Youngstown Construction plans to discontinue its roofing segment. Last year, this segment generated a contribution margin of $65,000 and incurred $70,000 in fixed costs. Discontinuing the segment will allow the company to avoid half of the fixed costs. What effect is expected to occur to the company’s overall profit? A. a decrease of $5,000 B. a decrease of $30,000 C. a decrease of $5,000 D. an increase of $30,000

Based on the amount that the company incurs in fixed costs from the division, discontinuing it would lead to B. a decrease of $30,000.

The effect on the company's income is:

= Income if continued + Unavoidable fixed cost

Income if continued is:

= Contribution margin - Fixed costs

= 65,000 - 70,000

= -$5,000

The effect on income is therefore:

= -5,000 + (70,000 / 2)

= -$30,000

In conclusion, there would be a decrease of $30,000.

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B. a decrease of $30,000

Explanation:

The computation of company’s overall profit is shown below:-

To continue = Contribution margin - Fixed cost

= $65,000 - $70,000

Loss = $5,000

To Discontinue =  Unavoidable fixed cost ÷ 2

= $70,000 ÷ 2

= $35,000

So, Net Loss = To continue (Loss) - To Discontinue

= $5,000 - $35,000

= $30,000

Therefore there is a decrease of $30,000

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