Question

Modern Company has four divisions. The budgeted revenues and expenses for each division for 2021 follows:

	Division
	A	B	C	D
Sales	$504,000	$948,000	$960,000	$1,240,000
Cost of goods sold	440,000	930,000	765,000	925,000
Selling & admin costs	96,000	202,500	144,000	210,000
Operating income (loss)	$(32,000)	$(184,500)	$51,000	$105,000

Further analysis of costs reveals the following percentages of variable costs in each division:

	A	B	C	D
Cost of goods sold	90%	80%	90%	85%
Selling & admin costs	50%	50%	60%	60%

Closing down any division would result in a savings of 40% of the fixed costs of that division.

Required:

1. Calculate the increase or decrease in operating income if Modern Company closes division B using the below table:

Answer 1

Modern Compnay operating Income before closing Division B
	Division A	Division B	Division C	Division D	Total
Sales	504000	948000	960000	1240000	3652000
COGS	440000	930000	765000	925000	3060000
Selling & Admin Costs	96000	202500	144000	210000	652500
Operating Income	-32000	-184500	51000	105000	-60500
Modern Compnay operating Income After closing Division B
	Division A	Division B	Division C	Division D	Total
Sales	504000	0	960000	1240000	2704000
COGS	440000	111600	765000	925000	2241600
Selling & Admin Costs	96000	60750	144000	210000	510750
Operating Income	-32000	-172350	51000	105000	-48350
Increase in Operating income is $12150 by Closing of Division B .
Fixed Cost and Variable Cost Elemint in Division B
COGS:
Variable 80%	744000
Fixed 20%	186000
Selling & Admin:
Variable 50%	101250
Fixed 50%	101250
Costs that will incur after closing Division B
60% of Fixed COGS	111600
60% of Fixed selling Costs	60750