Question

ABC Company operates three segments, of which two of them were showing a loss.

	Segment 1	Segment 2	Segment 3	Total
Sales……………………	$100,000	$200,000	$300,000	$600,000
Less Cost of goods sold	80,000	150,000	200,000	430,000
Gross margin………….	20,000	50,000	100,000	170,000
Less Operating expenses	30,000	70,000	70,000	170,000
Net operating income….	$(10,000)	$(20,000)	$30,000	$0

                  

      For each segment, 40% of its cost of goods sold and operating expenses are variable expenses and the remaining balances are fixed expenses. Total fixed expenses (operating and manufacturing) were allocated to each segment as follows:

Fixed Expenses Allocated to Each Segment
Segment 1	$10,000
Segment 2	$40,000
Segment 3	$70,000

     

    

     What would be the effect on the company’s overall profit if Segment 2 was dropped from their revenue line?

Select one:

a. Overall company’s profit will increase by $50,000.

b. Overall company’s profit will increase by $90,000

c. Overall company’s profit will increase by $60,000.

d. Overall company’s profit will decrease by $20,000.

Answer 1

					Segment 2
		Sales			200,000
		less variable expense
		cost of goods sold			60000
		operating expense			28000
		contribution margin			112,000
		Fixed cost
		cost of goods sold			90000
		operating expense			42000
		Total fixed cost			132,000
		Net income			-20,000
		Contribution margin lost of segment 2 is dropped					-112000
		Savings in fixed cost (132,000-40,000)					92000
		Decrease in net income					-20000
		answer)
		option d
		overall companys profit will decrease by $20,000