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Jamison Health Care is trying to decide if it should eliminate its orthopedic care division. Last...

Question:

Jamison Health Care is trying to decide if it should eliminate its orthopedic care division. Last year, the orthopedic division had a total contribution margin of $100,000 and allocated overhead costs of $200,000, of which $90,000 could be eliminated if the division were dropped. Should Jamison keep the division?

Contribution Margin:

The term contribution margin is the difference between sales and all variable costs that the company incurs. It is found mostly in internal reports by management when it uses the variable costing system.

Answer and Explanation:

Contribution Margin $100,000
Eliminated Overhead Costs if the division is dropped ($90,000)
Change in overall income ($10,000)


Jamison should keep the division because lost contribution margin exceeds fixed costs that will be eliminated if the division is dropped.


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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