Operating Loss Calculation for Dropping Geo Company's Western Territory
What is the change in the forecasted operating loss for the upcoming year if the western territory is dropped?
A. The loss will be reduced by $80,000.
B. The loss will be reduced by $400,000.
C. The loss will be increased by $80,000.
D. The loss will be increased by $400,000.
Answer:
A. The loss will be reduced by $80,000.
Explanation:
The computation change in the forecasted operating loss is shown below:
= Operating loss - fixed cost × remaining percentage
= $180,000 - $500,000 × 20%
= $180,000 - $100,000
= $80,000
Since 80% of the fixed cost is avoidable, we take the remaining percentage, which is 20%.
All other information that is given is not relevant, hence we ignore it.