Kim Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | l | }
\hline \text { Sales } & \$ 840,000 \
\hline \text { Variable expenses } & ( 540,000 ) \
\hline \text { Contribution margin } & \$ 300,000 \
\hline \text { Fixed expenses } & ( 480,000 ) \
\hline \text { Operating loss } & ( \$ 180,000 ) \
\hline
\end{array}$$
Kim Company's management is considering dropping the western territory and has determined that 90% of the fixed expenses are avoidable.What is the change in Kim Company's forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Question

Kim Company's western territory's forecasted income statement for the upcoming year is as follows:
$$\begin{array} { | l | l | } 
\hline \text { Sales } & \$ 840,000 \
\hline \text { Variable expenses } & ( 540,000 ) \
\hline \text { Contribution margin } & \$ 300,000 \
\hline \text { Fixed expenses } & ( 480,000 ) \
\hline \text { Operating loss } & ( \$ 180,000 ) \
\hline
\end{array}$$
Kim Company's management is considering dropping the western territory and has determined that 90% of the fixed expenses are avoidable.What is the change in Kim Company's forecasted operating loss for the upcoming year if the western territory is dropped? Assume the company predicts an operating loss across the entire company.

Quizplus · Accepted Answer

To determine the change in forecasted operating loss, we need to calculate the avoidable fixed costs in the western territory by multiplying the total fixed costs by 90%:

$480,000 x 0.9 = $432,000

Since the western territory is currently contributing a loss of $300,000 to the company's operating loss, dropping it would reduce the loss by the avoidable fixed costs:

$300,000 - $432,000 = -$132,000

Therefore, the forecasted operating loss would be reduced by $132,000 if the western territory is dropped.

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