The ABC Company has a division that has the following income statement: Sales$5,
ID: 2524180 • Letter: T
Question
The ABC Company has a division that has the following income statement:
Sales$5,000
Variable costs3,000
_____
Contribution Margin 2,000
Fixed Costs2,500
_____
Operating Income-500
What is the effect of operating this division on the operating income of the ABC Company if $800 of the fixed costs will not be avoided if the company shuts down the division? Should the ABC Company shut down the division in this case?
What is the effect of operating this division on the operating income of the ABC Company if $400 of the fixed costs will not be avoided if the company shuts down the division? Should the ABC Company shut down the division in this case?
Explanation / Answer
1 Loss in Contribution Margin -2000 Avoidable Fixed Costs 1700 =2500-800 Change in operating income -300 Operating income decreases by $300 No, ABC Company should not shut down the division in this case 2 Loss in Contribution Margin -2000 Avoidable Fixed Costs 2100 =2500-400 Change in operating income 100 Operating income increases by $100 Yes, ABC Company should shut down the division in this case
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