Valber Company is considering eliminating its Phone division. The company allocates fixed costs based on sales. If the Phone division is dropped, all of its variable costs are avoidable, and $152,000 of its fixed costs are avoidable. The impact on Valber’s income from eliminating the Phone division is: Desktops Laptops Tablets PhonesSales $ 362,000 $ 877,500 $ 700,000 $ 977,000Variable costs 203,000 637,000 530,000 797,000Contribution margin 159,000 240,500 170,000 180,000Fixed costs 73,200 176,300 140,800 197,000Net income (loss) 85,800 64,200 29,200 (17,000)
Question
Valber Company is considering eliminating its Phone division. The company allocates fixed costs based on sales. If the Phone division is dropped, all of its variable costs are avoidable, and 362,000 700,000 $ 977,000Variable costs 203,000 637,000 530,000 797,000Contribution margin 159,000 240,500 170,000 180,000Fixed costs 73,200 176,300 140,800 197,000Net income (loss) 85,800 64,200 29,200 (17,000)
Solution
To calculate the impact on Valber's income from eliminating the Phone division, we need to consider the contribution margin and the avoidable fixed costs of the Phone division.
The contribution margin of the Phone division is $180,000. This is the amount that the Phone division contributes to covering fixed costs and then generating profit. If the Phone division is eliminated, the company will lose this contribution margin.
However, the Phone division also incurs 152,000 of which are avoidable if the division is eliminated. This means that by eliminating the Phone division, the company can save $152,000 in fixed costs.
Therefore, the net impact on Valber's income from eliminating the Phone division is the loss of the contribution margin (152,000).
So, the impact on Valber's income = 152,000 (Avoidable fixed costs) = $28,000 loss.
This means that if Valber eliminates the Phone division, its income will decrease by $28,000.
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