Freemen Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | r | }
\hline \text { Sales revenue } & \$ 600,000 \
\hline \text { Variable costs } & \underline { 600,000 } \
\hline \text { Contribution margin } & \$ 0 \
\hline \text { Fixed costs } & \underline { 496,000 } \
\hline \text { Operating income (loss) } & \$ ( 496,000 )\
\hline
\end{array}$$ Freemen Company's management is considering dropping the western territory.This move would be financially advantageous only if the company could eliminate $496,000 of fixed cost.

Question

Freemen Company's western territory's forecasted income statement for the upcoming year is as follows:
 $$\begin{array} { | l | r | } 
\hline \text { Sales revenue } & \$ 600,000 \
\hline \text { Variable costs } & \underline { 600,000 } \
\hline \text { Contribution margin } & \$ 0 \
\hline \text { Fixed costs } & \underline { 496,000 } \
\hline \text { Operating income (loss) } & \$ ( 496,000 )\
\hline
\end{array}$$ Freemen Company's management is considering dropping the western territory.This move would be financially advantageous only if the company could eliminate $496,000 of fixed cost.

Quizplus · Accepted Answer

The net income for the western territory is forecasted to be -$294,000. If the company can eliminate $496,000 of fixed cost by dropping the territory, it would result in a net income of $202,000. Therefore, dropping the western territory would be financially advantageous.

Freemen Company's Western Territory's Forecasted Income Statement for the Upcoming