The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation: 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

Question

The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation:

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

Mayra Falcon · Accepted Answer

Final Answer : C, Explanation :  The fixed expenses that could be avoided if the Children's Division is eliminated are $170,000. However, the division is also contributing $200,000 to the company's profits. Therefore, if the division is eliminated, there will be a net loss of $30,000 ($200,000 - $170,000) to the company. Hence, option C is the correct answer.   The company would lose the $30,000 positive segment margin if the Children's Division is eliminated.

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