Granfield Company is considering eliminating its backpack division, which reported a loss for the recent year of $49,500 as shown below.

 Granfield Company is considering eliminating its backpack division, which reported a loss for the recent year of $49,500 as shown below.
 

Segment Income (Loss)
Sales    $ 990,000
Variable costs    490,000
Contribution margin    500,000
Fixed costs    549,500
Income (loss)    $ (49,500)

If the backpack division is dropped, all $490,000 of its variable costs are avoidable, and $219,800 of its fixed costs are avoidable. The impact on Granfield’s income from eliminating this business segment would be:



Multiple Choice

$500,000 increase


$280,200 increase


$219,800 increase


$280,200 decrease Correct

$500,000 decrease

Explanation
Segment Elimination Analysis    Continue    Eliminate    Income Increase (Decrease)
Sales    $ 990,000    $ 0    
Variable costs    490,000    0    
Contribution margin    500,000    0    
Fixed costs    549,500    329,700    
Income (loss)    $ (49,500)    $ (329,700)    $ (280,200)