Question

Review the situation below and provide your analysis on whether to discontinue the Community Events Department or not.

Fictitious information is provided below. This decision is whether to drop or retain a segment of the business.

A company is reviewing two departments within the organization - Special Events Department and the Community Events Department. The company's most recent monthly contribution format income statement regarding these two areas is as provided below.

A study indicates that $340,000 of the fixed expenses being charged to the Community Events Department are sunk costs or allocated costs that will continue even if the Community Events Department is dropped. In addition, the elimination of the Community Events Department will result in a 10% decrease in the sales of the Special Events Department.

What is the financial advantage (disadvantage) of discontinuing the Community Events Department? See learning object #2 . Be sure to show your work.

	Total		Special Events Department	Community Events Department
Sales	$4,000,000		$3,000,000	$1,000,000
Variable expenses	1,300,000		900,000	400,000
Contribution Margin	2,700,000		2,100,000	600,000
Fixed Expenses	2,200,000		1,400,000	800,000
Net Operating Income (Loss)	$500,000		$700,000	(200,000)

Answer 1

Contribution Format Income Statement(If Community Events is eliminated)
	Total
Sales Revenue($3,000,000*0.90)	$                  2,700,000
Variable Costs($2,700,000*30%)	$                     810,000
Contribution Margin	$                  1,890,000
Fixed Costs($1,400,000+$340,000)	$                  1,740,000
Net Income	$                     150,000
Since the Net Income has decreased due to elimination of Community Events hence discontinuing is not recommended
The Financial Disadvantage is $350,000($500,000-$150,000)