Question

Wasilko Corporation has two departments, Kids and Adults. The company’s most recent monthly contribution format income statement follows:

		Department
	Total	Kids	Adults
Sales	$4,200,000	$3,000,000	$1,200,000
Variable expenses	2,000,000	1,500,000	500,000
Contribution Margin	2,200,000	1,500,000	700,000
Fixed Expenses	2,200,000	1,300,000	900,000
Net operating income (loss)	0	200,000	(200,000)

A study indicates that $100,000 of the fixed expenses being charged to the Adults Department are sunk costs or allocated costs that will continue even if the Adults Department is dropped. In addition, the elimination of the Adults Department will result in a 20% decrease in the sales of the Kids Department. If the Adults Department is dropped, what will be the effect on the net operating income of the company as a whole?

Multiple Choice

• Decrease by $200,000

• Increase by $220,000

• Decrease by $220,000

• Decrease by $180,000

Answer 1

Option(A) Decreases by $200,000 is correct.

Given, Data:

Particulars	Total	Kids	Adults
Sales	$4200000	$3000000	$1200000
Variable	2000000	1500000	500000
Contribution	2200000	1500000	700000
Traceable Fixed	2200000	1300000	800000
NOI	0	200000	-100000
Common Fixed			100000
Net	0	200000	-200000

as per the given situation: of reduction of the adult department, it leads to a 20% reduction in kids department.

		20% Reduction	Drop out
Particulars	Total	Kids	Adults
Sales	$2400000	$2400000	0
Variable	1200000	1200000	0
Contribution	1200000	1200000	0
Traceable Fixed	1300000	1300000	0
NOI	-100000	-100000	0
COMMON	100000		100000
Net	-200000	-100000	-100000

The decision leads to a decrease in profit of $200,000.

*Common Fixed Expenses should not be allocated to the divisions. These expenses would remain even if one of the divisions were eliminated..

*Variable also associated with sales. If 20% of sales decreased it includes variable expenses also.

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