Wallen Corporation is considering eliminating a department that has an annual contribution margin of $80,000 and $160,000 in annual fixed costs.

Wallen Corporation is considering eliminating a department that has an annual contribution margin of $80,000 and $160,000 in annual fixed costs. Of the fixed costs, $90,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:

Garrison 16e Rechecks 2017-12-15

Multiple Choice

• $10,000
• ($10,000)

  Correct
• $80,000
• ($80,000)

Explanation

Avoidable fixed costs = $160,000 – $90,000 = $70,000

Contribution margin	$	80,000
Avoidable fixed costs		70,000
Segment margin	$	10,000

If the department were eliminated, the company would lose the department’s segment margin of $10,000.