Question

One department in a company had a contribution margin of $15,000 and a net loss from operations of $2,000. The indirect expenses allocated to this department would have been incurred whether or not the department existed. If this department had been eliminated, the company's reported net income would have been

a. $2,000 higher. b. $15,000 lower. c. $13,000 lower. d. The same with or without the department.

Answer 1

Answer is Option b $15000

Look up the following example:

Assume that this is the company’s situation with Department 1 and Department 2 :

Particulars	Department 1	Department 2	Company [Department 1+Department 2]
Contribution	50000	15000	65000
(-)Indirect Expense	10000	17000	27000
Net Income	40000	-2000	38000

If company eliminate department 2 the expense remains same [27000]

Particulars	Company
Contribution	50000
(-)Indirect Expense	27000
Net Income	23000

Change in net income:

Particulars	With Department 2	After eliminating department 2	Change
Contribution	65000	50000	15000
(-)Indirect Expense	27000	27000	0
Net Income	38000	23000	15000

There for change in net income if we eliminate Department 2 is $15000 which is equal to the contribution earned by the department 2 to the company.