Question

The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses:

	North	South
Sales	$1,060,000	$976,000
Variable Expenses	$522,000	$348,000
Traceable Fixed Expenses	$356,000	$290,000
Allocated Common Corporate Expenses	$256,000	$206,000
Net Operating Income (Loss)	$(74,000)	$132,000

Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in overall income of the company increasing (decreasing) by:

Group of answer choices

$132,000

$74,000

($182,000)

$58,000

Answer 1

Answer)

Present Income Statement

	North	South	Total
Sales	$1,060,000	$976,000	$2,036,000
Less: Variable Expenses	$522,000	$348,000	$870,000
Contribution margin	$538,000	$628,000	$1,166,000
Less: Traceable Fixed Expenses	$356,000	$290,000	$646,000
Less: Allocated Common Corporate Expenses	$256,000	$206,000	$462,000
Net Operating Income (Loss)	($74,000)	$132,000	$58,000

The current Net operating income of the company is $ 58,000.

Income Statement (If North division is eliminated)

	North	South	Total
Sales	-	$976,000	$976,000
Less: Variable Expenses	-	$348,000	$348,000
Contribution margin	-	$628,000	$628,000
Less: Traceable Fixed Expenses	-	$290,000	$290,000
Less: Allocated Common Corporate Expenses	$256,000	$206,000	$462,000
Net Operating Income (Loss)	($256,000)	$132,000	($124,000)

If North division is eliminated, the Net Operating income will fall to - $ 124,000.

Final Decision: If north division is eliminated, the net operating income of the company will decrease by $ 182,000 (from Net Operating Income of $ 58,000 to Net operating loss of $ 124,000).

Explanation: the Contribution margin of North division is $ 538,000 and its relevant fixed expense is $ 356,000 (i.e. Avoidable fixed expenses) and thus is Net operating Income based on relevant cost is $ 182,000 (i.e. $ 538,000 - $ 356,000). If North division is eliminated, the company will lose this Net operating income of $ 182,000 and accordingly the net operating income of the company will fall by $ 182,000.