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 $27,000.”

The Other Five Divisions Percy Division Total Sales $1,663,000 $100,300 $1,763,300 Cost of goods sold 978,700 76,800 1,055,500 Gross profit 684,300 23,500 707,800 Operating expenses 527,700 50,500 578,200 Net income $156,600 $ (27,000 ) $129,600 In the Percy Division, cost of goods sold is $60,000 variable and $16,800 fixed, and operating expenses are $30,800 variable and $19,700 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

Answer 1

Percy Division
Income Statement
Sales	$ 100,300.00
Variable costs
Cost of goods sold	$    60,000.00
Operating expenses	$    30,800.00
Total variable	$    90,800.00
Contribution margin	$      9,500.00
Fixed costs
Cost of goods sold	$    16,800.00
Operating expenses	$    19,700.00
Total fixed	$    36,500.00
Net income (loss)	$ (27,000.00)

Veronica is wrong
Even though the final Operating income from Percy Division is Negative still there is a Contribution of $9500 and if Division is discontinued there will be overall Decrease in net income of $9500 because if division is discontinued the fixed cost allocated towards Percy division will still occur.
So Veronica is wrong and Percy division should not be Discontinued.