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 $26,100.”

		The Other Five Divisions		Percy Division			Total
Sales		$1,665,000		$100,100			$1,765,100
Cost of goods sold		978,300		76,000			1,054,300
Gross profit		686,700		24,100			710,800
Operating expenses		526,800		50,200			577,000
Net income		$159,900		$ (26,100	)		$133,800

In the Percy Division, cost of goods sold is $59,000 variable and $17,000 fixed, and operating expenses are $29,100 variable and $21,100 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

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Answer 1

Step 1: Seggregation of Percy Division's cost into fixed and variable

Amounts in $	Variable	Fixed	Total
Cost of goods sold	59,000	17,000	76,000
Operating expenses	29,100	21,100	50,200

Step 2: Computation of net loss in case Percy Division is eliminated

Amounts in $	Continue	Eliminate	Discontinued
	A	B	C = A + B
Sales	100,100	(100,100)	-
Variable costs
Cost of goods sold	59,000	(59,000)	-
Operating expenses	29,100	(29,100)	-
Total variable	88,100	(88,100)	-
Contribution margin	12,000	(12,000)	-
Fixed costs
Cost of goods sold	17,000	No elimination	17,000
Operating expenses	21,100	No elimination	21,100
Total fixed	38,100	-	38,100
Net income /(loss)$	(26,100)	(12,000)	(38,100)

As none of the Percy Division’s fixed costs will be eliminated, it will result in an increase in net loss by $12,000 (i.e. the contribution margin of Percy division); hence Percy Division should not be eliminated.