Question
Wasilko Corporation has two departments, Kids and Adults. The company’s most recent monthly contribution format income...
Wasilko Corporation has two departments, Kids and Adults. The company’s most recent monthly contribution format income statement follows:
|
Total |
Kids |
Adults |
|
|
Sales |
$4,200,000 |
$3,000,000 |
$1,200,000 |
|
Variable expenses |
2,000,000 |
1,500,000 |
500,000 |
|
Contribution Margin |
2,200,000 |
1,500,000 |
700,000 |
|
Fixed Expenses |
2,200,000 |
1,300,000 |
900,000 |
|
Net operating income (loss) |
0 |
200,000 |
(200,000) |
A study indicates that $250,000 of the fixed expenses being charged to the Adults Department are sunk costs or allocated costs that will continue even if the Adults Department is dropped. In addition, the elimination of the Adults Department will result in a 20% decrease in the sales of the Kids Department. If the Adults Department is dropped, what will be the effect on the net operating income of the company as a whole?
Multiple Choice
Decrease by $310,000
Decrease by $350,000
Decrease by $390,000
Increase by $390,000
Homework Answers
Answer #1
OPTION - DECREASE BY $350,000.
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