Question

Waterway Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Waterway made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $26,900.”

		The Other Five Divisions		Percy Division			Total
Sales		$1,665,000		$100,600			$1,765,600
Cost of goods sold		978,700		77,000			1,055,700
Gross profit		686,300		23,600			709,900
Operating expenses		527,200		50,500			577,700
Net income		$159,100		$ (26,900	)		$132,200

In the Percy Division, cost of goods sold is $59,200 variable and $17,800 fixed, and operating expenses are $31,600 variable and $18,900 fixed. None of the Percy Division’s fixed costs will be eliminated if the division is discontinued.

Is Waterway right about eliminating the Percy Division? Prepare a schedule to support your answer. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Continue		Eliminate		Net Income Increase (Decrease)
Sales		$		$		$
Variable costs
Cost of goods sold
Operating expenses
Total variable
Contribution margin
Fixed costs
Cost of goods sold
Operating expenses
Total fixed
Net income (loss)		$		$		$

Waterway is ????

Answer 1

Answer:
	Continue (A)	Eliminate (B)	Net Income Increase (Decrease) (B -A )
Sales	$ 100,600	$ 0	($ 100,600)
Less: Variable costs
-    Cost of goods sold	$ 59,200	$ 0	59200
-    Operating expenses	$ 31,600	$ 0	31600
Total variable	$ 90,800	$ 0	$ 90,800
Contribution margin(A)	$ 9,800	$ 0	($ 9,800 )
Less: Fixed costs
-    Cost of goods sold	$ 17,800	$ 17,800	0
-    Operating expenses	$ 18,900	$ 18,900	0
Total Fixed costs(B)	$ 36,700	$ 36,700	0
Net income (loss) (A - B)	($26,700)	($36,700)	($9,800)
Waterway is incorrect about eliminating the Percy Division since it will generate a loss