Rabbitt Corporation Is Considering Whether to Discontinue a Division That

question 255

Multiple Choice

Rabbitt Corporation is considering whether to discontinue a division that generates a total contribution margin of $40,000 per year. Fixed manufacturing overhead allocated to this division is $60,000, of which 12,000 is unavoidable. If Rabbitt Corporation were to eliminate this division, the effect on the company's operating income would be a(n)

• A) increase in total operating income of $8,000.
• B) decrease in total operating income of $8,000.
• C) increase in total operating income of $28,000.
• D) decrease in total operating income of $28,000.

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Definitions:

Direct Costs

Expenses that can be directly attributed to the production of specific goods or services.

Underpricing

The phenomenon where new securities, such as stocks or bonds, are priced below their true market value at the initial offering, often leading to an immediate increase in their value when traded.

Equity Include

The incorporation of ownership interest or stake in a company through the holding of its equity or stocks.

Seasoned Equity Offering

An issuance of stock by a company after its initial public offering to raise additional capital.