Question

The operations of Winston Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows:

	Blink Division				Blur Division				Total
Sales	$	305,000			$	178,000			$	483,000
Variable costs		103,000				82,000				185,000
Contribution margin	$	202,000			$	96,000			$	298,000
Direct fixed costs		89,000				75,000				164,000
Segment margin	$	113,000			$	21,000			$	134,000
Allocated common costs		44,000				36,500				80,500
Operating income (loss)	$	69,000			$	(15,500	)		$	53,500

Operating income for Winston Corporation, as a whole, if the Blur Division were dropped would be:

Answer 1

$75,000 of Blur Division direct fixed cost is avoidable. But the allocated common fixed cost $36,500 of Blur Division is unavoidable.

Calculation of operating income of Winston Corporation after dropped the Blur division.

Particulars	$
Sales	305,000
Less variable cost	103,000
Contribution margin	202,000
Less Direct fixed cost	89,000
Segment margin	113,000
Less Allocated common fixed cost	80,500
Operating income	32,500

The Winston corporation can avoid direct fixed cost $75,0000 of Blur division by discontinuing Blur division. But Winton Corporation can avoid common fixed cost $36,500 of Blur division by taking the action for eliminating Blur division.

After eliminating Blur division , the common fixed cost allocated to Blur division $36,500 is charged to Blink division. Therefore the common fixed cost of Blink division is $80,500 (36,500 + 44,000).

Increase in Blink division common fixed cost yo 80,500 will reduce the operating income of Winston corporation is $32,500.

After eliminating the Blur division the Winston corporation completely loss the income from Blur division.

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