Thomas company has the following data for one of their recliners. this information is for the deluxe recliner model: sales $200,000 variable costs 90,000 contribution margin 110,000 fixed costs 150,000 operating income (loss) $(40,000) assume that if the deluxe recliner model is dropped, there would be a savings of 30% of the current fixed costs

If the division is discontinued theincome of the firm will decrease by 80,000

It is a financial disadvantage to do it.

Explanation:

The department data can be disclosure as follow:

contribution                 110,000

tracable fixed cost       (30,000) (20% ofthe fixed cost)

operating income         80,000

allocate fixed                (120,000) (150,000 - 30,000)

Result                             (40,000)

If the segment is discontinued; the other department will absorp the 80,000 which are currently taking by the deluxe recliner. Thus, income will drop by 80,000 if discontinued.

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