One department in a company had a contribution margin of $15,000 and a net loss
ID: 2402975 • Letter: O
Question
One department in a company had a contribution margin of $15,000 and a net loss from operations of $2,000. The indirect expenses allocated to this department would have been incurred whether or not the department existed. If this department had been eliminated, the company's reported net income would have been
a. $2,000 higher.
b. $15,000 lower.
c. $13,000 lower.
d. The same with or without the department.
a. $2,000 higher.
b. $15,000 lower.
c. $13,000 lower.
d. The same with or without the department.
Explanation / Answer
Answer is Option b $15000
Look up the following example:
Assume that this is the company’s situation with Department 1 and Department 2 :
Particulars
Department 1
Department 2
Company [Department 1+Department 2]
Contribution
50000
15000
65000
(-)Indirect Expense
10000
17000
27000
Net Income
40000
-2000
38000
If company eliminate department 2 the expense remains same [27000]
Particulars
Company
Contribution
50000
(-)Indirect Expense
27000
Net Income
23000
Change in net income:
Particulars
With Department 2
After eliminating department 2
Change
Contribution
65000
50000
15000
(-)Indirect Expense
27000
27000
0
Net Income
38000
23000
15000
There for change in net income if we eliminate Department 2 is $15000 which is equal to the contribution earned by the department 2 to the company.
Particulars
Department 1
Department 2
Company [Department 1+Department 2]
Contribution
50000
15000
65000
(-)Indirect Expense
10000
17000
27000
Net Income
40000
-2000
38000
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