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22. Praline Company is considering whether to discontinue one of its departments, and a study has...

22. Praline Company is considering whether to discontinue one of its departments, and a study has been conducted for this purpose. The contribution margin in the department is $200,000 per year. The fixed expenses charged to the department are $260,000 per year. It is estimated that $160,000 of these fixed expenses will be eliminated if the department is discontinued. If the department is discontinued, what is the effect on the company's overall net operating income?

The overall net operating income will decrease by $40,000 per year.

The overall net operating income will increase by $40,000 per year.

The overall net operating income will increase by $100,000 per year.

The overall net operating income will decrease by $100,000 per year.

None of the above.

Business   Accounting   
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Answer #1

Contribution margin from department = $200,000

fixed expenses charged to department = $260,000

Avoidable fixed expense if department is discontinued = $160,000

Differential analysis if department is discontinued

Savings in fixed expense 160,000
Loss of contribution margin -200,000
Decrease in operating income -$40,000

Thus, if the department is discontinued, The overall net operating income will decrease by $40,000 per year.

First option is correct

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