Question

A segment has the following data: Sales \$780000 Variable expenses 340000 Fixed expenses 550000 What will...

A segment has the following data:

 Sales \$780000 Variable expenses 340000 Fixed expenses 550000

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?

 \$340000 increase
 \$440000 decrease
 \$5667 decrease
 Cannot be determined from the data provided

Answer : option ( B )

\$ 440,000 decrease

Currently this business unit is generating a net loss of \$110,000

total revenue - variable expenses - fixed costs = \$780,000 - \$340,000 - \$550,000 = -\$110,000

if the unit is eliminated, then the revenue and variable expenses will be gone, but the fixed costs will be allocated to other business units. So instead of losing \$110,000, the company will lose \$550,000. The company's net income will decrease by \$550,000 - \$110,000 = \$440,000

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