Federal Parcel Service, an international delivery service, is considering eliminating operations in Canada. If the company dropped the Canadian market, it would lose revenues of $975,000 annually. Management assigns costs of $1,050,000 ($625,000 variable and $425,000 fixed) to the Canadian market. Therefore, the Canadian market has an apparent annual loss of -$75,000 per year ($975,000 revenue minus $1,050,000 costs). Careful cost analysis reveals that if Canadian operations were dropped, the reduction in costs would be only $625,000 of variable and $50,000 of fixed costs. The remaining $375,000 of fixed costs were general fixed costs the company allocated to the Canadian market. These costs would continue to be incurred and would not be saved by shutting down the Canadian market.
Keep Eliminate Differential