North Division has the following information: Sales $1,200,000 Variable expenses

Question

North Division has the following information:

Sales                                                              $1,200,000

Variable expenses                                             640,000

Fixed expenses                                                  620,000

If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped?

$560,000 decrease.

$580,000 increase.

$60,000 increase.

$620,000 decrease.

$560,000 decrease.

$580,000 increase.

$60,000 increase.

$620,000 decrease.

Explanation / Answer

Contribution from the division = Sales - Variable exp

= 1200000-640000

= 560000

Due to the elimination of division contribution i.e. income will decrease by $560000

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