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Managerial Accounting
. Accounting
. University of Pittsburgh
. Managerial Accounting
. Question #2382298
Managerial Accounting
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Anonymous Student
5 months ago
The following information relates to next year's projected operating results of the Children's
Division of Grunge Clothing Corporation:

Contribution margin $ 200,000   Fixed expenses   500,000   Net operating loss $ (300,000 )

If the Children's Division is eliminated, $170,000 of the above fixed expenses could be avoided.
The annual financial advantage (disadvantage) for the company of eliminating this division should
be:  A) ($300,000) B) $30,000 C) ($30,000) D) $300,000

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Expert Answer
4 months ago

The correct alternative is Option C) ($30,000).

The annual financial advantage (disadvantage) for the corporation on the elimination
of the department is calculated as follows:
\begin{aligned} \text{Financial Advantage}&=\text{Contribution Margin Lost}+\
text{Avoidable Fixed Expenses} \\ &=\$\left( 200,000 \right)+\$170,000 \\ &=\$\
left( 30,000 \right) \end{aligned}Financial Advantage
=Contribution Margin Lost+Avoidable Fixed Expenses=$(200,000)+$170,000=$(30,000)