Youngstown construction plans to discontinue its roofing segment. Last year, this segment generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. Discontinuing the segment will allow the company to avoid half of the fixed costs. What effect is expected to occur to the company’s overall profit?.

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29-11-2021
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Youngstown construction plans to discontinue its roofing segment. Last year, this segment generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. Discontinuing the segment will allow the company to avoid half of the fixed costs. What effect is expected to occur to the company’s overall profit?.

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jaquelinefvr jaquelinefvr · Answer 1 · 2021-12-09T15:09:28+01:00

The effect expected to occur on the company's overall earnings if Youngstown plans to discontinue its roofing business is a $30,000 reduction.

We were able to find this value by calculating the company's overall profit, using the formula:

To continue:

= contribution margin - fixed cost

To discontinue:

= Inevitable fixed cost / 2

So calculating, we find:

To continue:

= $65,000.00 - $70,000

= -$5,000

(loss)

To discontinue:

= $70,000/2

=$35,000.00

Therefore, to calculate the net loss, we use the following formula:

Net loss: continue - discontinue

= -$5,000.00 - 35,000

= $30,000.00

Therefore, it is correct to say that Youngstown will have a $30,000 reduction in profit by discontinuing the business.

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