Astudy has been conducted to determine if one of the departments in parry company should be discontinued. the contribution margin in the department is $50,000 per year. fixed expenses charged to the department are $65,000 per year. it is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued. these data indicate that if the department is discontinued, the company's overall net operating income would:

decrease by $25,000 per year
increase by $25,000 per year
decrease by $10,000 per year
increase by $10,000 per year

The correct answer is increases by $10,000 per year

Explanation:

Given:

contribution margin in the department= $50,000 per year

Fixed expenses charged to the department = $65,000 per year

Now,

Current net income = Contribution - Fixed expenses

or

Current net income = $50000 - $65000 = -$15000  (negative sign depicts loss)

Also,

Fixed cost = $65000 - $40000 = $25,000

Thus,  

If this department is discontinued, the loss of $15000 would be eliminated.

but the fixed cost will be there  

The net operating income would decrease by

= $25000 - $15000

= $10,000

Hence, the correct answer is increases by $10,000 per year

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