US CMA Part 2 · Chapter 6 · Question 8 of 22
Eldon Stores' garden segment reports sales of $600,000, variable costs of $390,000 and fixed costs of $260,000, of which $150,000 would be eliminated if the segment were closed (the rest is allocated corporate overhead). What would be the effect on company operating income of closing the segment?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Decrease of $60,000
Explanation
Closing the segment loses its contribution margin of $600,000 - $390,000 = $210,000 but saves avoidable fixed costs of $150,000. Net effect = -$210,000 + $150,000 = -$60,000. The reported segment loss of $50,000 is misleading because $110,000 of allocated overhead would continue.
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