Reference no: EM132603141

A company has two departments, Kids and Adults. The company's most recent monthly contribution format income statement follows:

                                                                  Department

                                     Total                  Kids                        Adults

Sales                         $4,200,000     $3,000,000      $1,200,000

Variable expenses            2,000,000      1,500,000         500,000

Contribution Margin            2,200,000      1,500,000      700,000

Fixed Expenses                  2,200,000         1,300,000   900,000

Net operating income (loss)       0                200,000    (200,000)

Question 1: A study indicates that $50,000 of the fixed expenses being charged to the Adults Department are sunk costs or allocated costs that will continue even if the Adults Department is dropped. In addition, the elimination of the Adults Department will result in a 20% decrease in the sales of the Kids Department. If the Adults Department is dropped, what will be the effect on the net operating income of the company as a whole?

Multiple Choice

Option 1: Decrease by $150,000

Option 2: Increase by $170,000

Option 3: Decrease by $170,000

Option 4: Decrease by $130,000