Question

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 $25,700.”

		The Other Five Divisions		Percy Division			Total
Sales		$1,663,000		$100,400			$1,763,400
Cost of goods sold		977,000		76,200			1,053,200
Gross profit		686,000		24,200			710,200
Operating expenses		528,400		49,900			578,300
Net income		$157,600		$ (25,700	)		$131,900

In the Percy Division, cost of goods sold is $59,100 variable and $17,100 fixed, and operating expenses are $30,500 variable and $19,400 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		$enter sales in dollars		$enter sales in dollars		$enter sales in dollars
Variable costs
Cost of goods sold		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars
Operating expenses		enter operating expenses in dollars		enter operating expenses in dollars		enter operating expenses in dollars
Total variable		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts
Contribution margin		enter contribution margin in dollars		enter contribution margin in dollars		enter contribution margin in dollars
Fixed costs
Cost of goods sold		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars
Operating expenses		enter operating expenses in dollars		enter operating expenses in dollars		enter operating expenses in dollars
Total fixed		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts
Net income (loss)		$enter net income or loss in dollars		$enter net income or loss in dollars		$enter net income or loss in dollars

Veronica is select an option                                                          incorrect/correct?

Answer 1

	Continue	Eliminate	Net Income Increase (Decrease)
Sales	$    100,400.00	0	$  (100,400.00)
Variable costs
Cost of goods sold	$      59,100.00	$                -	$      59,100.00
Operating expenses	$      30,500.00	$                -	$      30,500.00
Total variable	$      89,600.00	$                -	$      89,600.00
Contribution margin	$      10,800.00		$    (10,800.00)
Fixed costs
Cost of goods sold	$      17,100.00	$   17,100.00	$                   -
Operating expenses	$      19,400.00	$   19,400.00	$                   -
Total fixed	$      36,500.00	$   36,500.00	$                   -
Net income (loss)	$    (25,700.00)	$ (36,500.00)	$    (10,800.00)
Veronica is select an option                                                          incorrect/correct?	Incorrect
Veronica is incorrect. The incremental analysis shows that net income will be$10,800  less if the percy Division is eliminated. This amount equals the contribution margin that would be lost by discontinuing the division