Question

Cliff Corporation is considering eliminating a department that has annual sales of $86,000, variable costs of $40,000, and annual fixed costs of $60,000. Of the fixed costs, $10,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be _______.

Multiple Choice

• ($36,000)

• $4,000

• ($4,000)

• $36,000

Answer 1

Answer: $4,000

.

.

Sales	$86,000
Less: Variable costs	$40,000
Contribution margin	$46,000
Less: Avoidable fixed cost    [Total fixed cost - Unavoidable fixed cost = $60,000 - $10,000]	$50,000
Segment margin	($4,000)
If the department is eliminated, the company would not incur a negative segment margin of $4,000. So, the company is having a financial advantage of $4,000 if the department is eliminated.