Question

The following information relates to next year's projected operating results of the Aluminum Division of Wroclaw...

The following information relates to next year's projected operating results of the Aluminum Division of Wroclaw Corporation:

Contribution margin......................

$1,500,000

Fixed expenses..............................

(1,700,000)

Net operating loss..........................

$(200,000)

If Aluminum Division is dropped, $1,000,000 of the above fixed expenses would be eliminated. What will be the effect on Wroclaw's profit next year if Aluminum Division is dropped instead of being kept?

A) $500,000 decrease

B) $800,000 increase

C) $1,000,000 increase

D) $1,200,000 increase

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Answer #1

Answer:-If Aluminum Division is dropped the Wroclaw’s profit will decrease next year by $500000.

Explanation:-If Aluminum division is dropped the contribution margin of $1500000 will be lost but on other hand $1000000 of avoidable fixed expenses would be saved.

Hence remaining contribution margin of $500000 (ie- $1500000-$1000000) will be lost.   

The unavoidable fixed costs of $700000 will be continue to occur whether division is continue or not.

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