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The question asks what the contribution margin for the whole company will be if the Restaurant division is discontinued. If that happens, the Merchandise and Automotive divisions will also lose 5% of their business. The present contribution margin for the whole company is $430,000 ($1,000,000 ? $570,000). The contribution margins for both the Merchandise and the Automotive divisions are $200,000, for a total of $400,000. The company will lose 5% of that, or $20,000, in its total contribution margin, from decreases in sales at those divisions. In addition, the company will lose the $30,000 contribution margin from the Restaurant division ($100,000 ? $70,000). Therefore, the total decrease in the company’s contribution margin from discontinuing the Restaurant division will be $20,000 + $30,000, or $50,000. Since the present contribution margin is $430,000, the revised contribution margin after discontinuing the Restaurant division will be $430,000 ? $50,000, which is $380,000.
This is what the revised fixed costs would be if the Restaurant segment is eliminated. The question asks for the company's total contribution margin if the Restaurant segment is discontinued. The contribution margin is sales minus variable costs. Fixed costs are not included.
This is the revised operating income if the Restaurant segment is eliminated. The question asks for the company's total contribution margin if the Restaurant segment is discontinued. The contribution margin is sales minus variable costs. Fixed costs are not included.
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Management is contemplating the discontinuance of the Restaurant segment since "it is losing money." If this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels. What will Whitman's total contribution margin be if the Restaurant segment is discontinued?