The following information relates to next year\'s projected operating results of
ID: 2451870 • Letter: T
Question
The following information relates to next year's projected operating results of the Aluminum Division of Wroclaw Corporation:
Contribution margin......................
$1,500,000
Fixed expenses..............................
1,700,000
Net operating loss..........................
(200,000)
If Aluminum Division is dropped, $1,000,000 of the above fixed expenses would be eliminated. What will be the effect on Wroclaw's profit next year if Aluminum Division is dropped instead of kept as a division of Wroclaw ?
A)$500,000 decrease
B)$800,000 increase
C)$1,000,000 increase
D)$1,200,000 increase
Contribution margin......................
$1,500,000
Fixed expenses..............................
1,700,000
Net operating loss..........................
(200,000)
Explanation / Answer
Fixed cost that will continue if aluminum division is dropped = 1,700,000 - 1,000,000 = 700,000
There will no contribution from this division as it will be dropped
so loss from this division = 0 - 700,000 = 700,000
nt decline in profit = 700,000 - 200,000 = $ 500,000 (decrease)
correct option is "A" - 500,000 decrease
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