Question

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

Answer 1

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.