Q25-17RQ - Horngren'S Financial And Managerial Accounting

Question

Explain why a segment with an operating loss can cause the company to have a decrease in total operating income if the segment is dropped.

Step-by-Step Solution

Answer

Answer

Dropping a segment may lead to a decrease in total operating income if such a segment has a positive contribution margin.

Step-by-Step Solution Step 1: Meaning of Operating Income

Operating income refers to the revenue generated by a business from its major functions. It includes the revenues generated from the sale and purchase of goods or services after deducting the related expenses.

Step 2: Loss in a segment leading to a decrease in operating income

A dropped segment may lead to a decrease in total operating income if such a segment is has a positive contribution margin. There may be a situation where a segment has a positive contribution margin but has an operating loss. It means that such a segment is helping the company to recover some of its fixed costs, and dropping the segment will decrease the total operating income.