Question

The most recent income statement for the South Branch of Harbor Bank is presented below:

      Sales                                        $57,000

      Variable costs                            31,500

      Avoidable fixed costs                 13,500

      Unavoidable fixed costs              20,000

      Operating loss                          $(8,000)

Harbor Bank is thinking about eliminating the South Branch. If the branch is eliminated, Harbor Bank's operating income will ________.

Question 7 options:

	decrease by $31,500
	increase by $8,000
	increase by $25,500
	decrease by $12,000

Answer 1

Harbor Bank's operating income will decrease by $12,000

Working notes for the above answer is as under

At this point company should consider only the relevant cost. Here relevant cost are

Variable cost and,

Avoidable fixed cost

Sales	-57000
Variable costs	31500
Loss of contribution margin	-25500
Add:     Avoidable fixed costs	13500
Decrease in income	-12000