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Edwards company plans to discontinue a department that has a contribution margin of 25,000 and...

Question:

Edwards company plans to discontinue a department that has a contribution margin of 25,000 and 48,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect of this discontinuance on Edwards net operating income would be an:

a) increase of 25,000

b) increase of 2,000

c) decrease of 2,000

d) decrease of 23,000

Relevant Costs of Discontinuing a Department:

When calculating the financial impact that discontinuing a department will have on the net operating income, care should be taken to only include relevant costs, which are costs that will be avoided if the department is closed.

Answer and Explanation:


The effect of this discontinuance on Edwards net operating income would be:

Loss in contribution margin $(25,000)
Saving in avoidable fixed costs 27,000
Increase in net operating income $2,000


The correct option is b)


Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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