Question

In: Accounting

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

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:

Solutions

Expert Solution

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

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