Wasilko Corporation 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)
A study indicates that $250,000 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?
a. Decrease by $310,000
b. Decrease by $350,000
c. Decrease by $390,000
d. Increase by $390,000