In: Accounting
Exercise 7-15 (Video)
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica 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 $26,600.”
The Other Five Divisions |
Percy Division |
Total | ||||||
Sales | $1,664,000 | $100,500 | $1,764,500 | |||||
Cost of goods sold | 978,500 | 76,700 | 1,055,200 | |||||
Gross profit | 685,500 | 23,800 | 709,300 | |||||
Operating expenses | 527,500 | 50,400 | 577,900 | |||||
Net income | $158,000 | $ (26,600 | ) | $131,400 |
In the Percy Division, cost of goods sold is $59,400 variable and
$17,300 fixed, and operating expenses are $30,100 variable and
$20,300 fixed. None of the Percy Division’s fixed costs will be
eliminated if the division is discontinued.
Is Veronica 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) | $ | $ | $ |
Veronica is
incorrectcorrect |
Data Given : | |||
The Other Five Division | Percy Division | Total | |
Sales | $1664000 | $100500 | $1764500 |
Cost of goods sold | 978500 | 76700 | 1055200 |
Gross profit | 685500 | 23800 | 709300 |
Operating expenses | 527500 | 50400 | 577900 |
Net income | $158000 | $-26600 | $131400 |
Percy Division : | Varaible Cost | Fixed Cost | Total |
Cost of Goods Sold | 59400 | 17300 | 76700 |
Operating Expenses | 30100 | 20300 | 50400 |
Is Veronica right about eliminating the Percy Division?
Schedule:
Continue | Eliminate | Net Income Increase/(Decrease) | |
Sales | $100500 | $-100500 | |
Variable Cost: | |||
Cost of Goods Sold | 59400 | -59400 | |
Operating Expenses | 30100 | -30100 | |
Total Variable Cost | 89500 | -89500 | |
Contribution Margin | 11000 | -11000 | |
Fixed Cost: | |||
Cost of Goods Sold | 17300 | 17300 | 0 |
Operating Expenses | 20300 | 20300 | 0 |
Total Fixed Cost | 37600 | 37600 | 0 |
Net Income/(Loss) | $-26600 | $-37600 | $-11000 |
So Veronica is not correct as the incremental analysis that if Percy division eliminated the net income comes down to $11000. Because Fixed costs cannot be avoided if it is eliminated.