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 $150,000 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?

Answer 1

decrease by $250000

	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)	$                        -	$            200,000	$         (200,000)
If adult dept is closed
	total	kids
sales (3000000*80%)	$        2,400,000	$        2,400,000
variable expenses	$        1,200,000	$        1,200,000
contribution margin	$        1,200,000	$        1,200,000
fixed expenses	$        1,450,000	$        1,450,000
net operating income(loss)	$          (250,000)	$          (250,000)
so there is a further loss of	$          (250,000)