Question

50. North Division has the following information: Sales $1170000 Variable expenses 655000 Fixed expenses 620000 If...

50. North Division has the following information:

Sales $1170000
Variable expenses 655000
Fixed expenses 620000


If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped?

a) $620000 decrease

b) $105000 increase

c) $550000 increase

d) $515000 decrease

Homework Answers

Answer #1

If the North Division is eliminated and the fixed expenses are allocated to other divisions of the company, there will be the following two effects:

1. There will be no change in the company's overall fixed cost.

2. The contribution margin (Sales - Variable expenses) of the North Division will be lost by the company.

Now, the contribution margin of the North Division is as follows:

$1,170,000 - $655,000 = $515,000

Hence, the effect on the net income if the division is dropped will be a decrease by $515,000.

Hence, option d is the correct answer.

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