Question

A segment has the following data:
Sales
$700,000
Variable expenses
300,000
Fixed expenses
550,000
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?

Answer 1

Answer:

Net income will decrease by $400,000

Explanation:

Currently this business unit is generating a net loss of $150,000:

total revenue - variable expenses - fixed costs = $700,000 - $300,000 - $550,000 = -$150,000

if the unit is eliminated, then the revenue and variable expenses will be gone, but the fixed costs will be allocated to other business units. So instead of losing $150,000, the company will lose $550,000. The company's net income will decrease by $550,000 - $150,000 = $400,000