Question

In: Accounting

Exercise 7-15 (Video) Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance...

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

Solutions

Expert Solution

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.


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