A company expects its three departments to yield the following income for next y

Question

A company expects its three departments to yield the following income for next year:

Dept A: Sales $6,000; Avoidable expenses $2,000; Unavoidable expenses $1,500; Total expenses $3,500; Net income (loss) $2,500
Dept B: Sales $5,000; Avoidable expenses $1,000; Unavoidable expenses $3,000; Total expenses $4,000; Net inome (loss) $1,000
Dept C: Sales $6,800; Avoidable expenses $4,000; Unavoidable expenses $2,500; Total expenses $6,500; Net income (loss) $300

Compute the change to the company's total net income if Dept. C is eliminated.

$300 decrease
$300 increase
$2,800 decrease
$2,800 increase
$6,800 decrease

Explanation / Answer

If department C is eliminated: There will be less of Sales 6800 and avoidable expenses of 4000. Thus, there will be a decrease in net income of $6800 - 4000 = $2800 Note that the unavoidable expenses of $2500 cannot be avoided and will be apportioned to other department if department C is eliminated. Thus, the cost avoided will only be $4000. Thus, the answer is $2800 decrease.

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