Question

In: Accounting

Dudley Transport Company divides its operations into four divisions. A recent income statement for its West...

Dudley Transport Company divides its operations into four divisions. A recent income statement for its West Division follows:

DUDLEY TRANSPORT COMPANY
West Division
Income Statement for the Year 2019
Revenue $ 300,000
Salaries for drivers (210,000 )
Fuel expenses (30,000 )
Insurance (42,000 )
Division-level facility-sustaining costs (24,000 )
Companywide facility-sustaining costs (78,000 )
Net loss $ (84,000 )

Required

By how much would companywide income increase or decrease if West Division is eliminated? Should West Division be eliminated?

Assume that West Division is able to increase its revenue to $324,000 by raising its prices. Determine the amount of the increase or decrease that would occur in companywide net income. Should West Division be eliminated if revenue were $324,000?

What is the minimum amount of revenue required to justify continuing the operation of West Division?

A: Income would INCREASE by _____?

B: Income would INCREASE by _____?

C: minimum amount of revenue _____?

Solutions

Expert Solution

1. Income Statement showing profit/(loss) before and after charging Companywide facility-sustaining costs of West Division is as follows:

Even if the company decides to eliminate it's West Division, it would still incur Companywide facility-sustaining costs as these are not dependent on operation of West Division.

Therefore, the companywide income would increase by the amount West Division was losing before charging Companywide facility-sustaining costs i.e $6,000.

2. If the West Division is able to increase its revenue to $324,000 by raising its prices then the revised income statement would be as follows:

Thus in that case companywide net income would decrease by $18,000 (i.e. the amount of profit earned before charging Companywide facility-sustaining costs) if it decides to eliminate its West Division.

3. The minimum amount of revenue required to justify continuing the operation of West Division would be the amount at which its profit before charging Companywide facility-sustaining costs is zero.

From the calculation done above in (1), we can see that at a revenue of $300,000, company is losing $6,000 before charging Companywide facility-sustaining costs. Therefore, the amount of revenue required to make profit before charging Companywide facility-sustaining costs as zero would be $300,000 + $6,000 = $306,000

Thus at a revenue of $306,000 or more, the company could justify continuing the operation of West Division.

ekkarill92 answered 1 year ago
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