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 $27,000.”

		The Other Five Divisions		Percy Division			Total
Sales		$1,665,000		$100,000			$1,765,000
Cost of goods sold		978,300		76,600			1,054,900
Gross profit		686,700		23,400			710,100
Operating expenses		528,100		50,400			578,500
Net income		$158,600		$ (27,000	)		$131,600

In the Percy Division, cost of goods sold is $60,100 variable and $16,500 fixed, and operating expenses are $29,200 variable and $21,200 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		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
Variable costs
Cost of goods sold		enter a dollar amount		enter a dollar amount		enter a dollar amount
Operating expenses		enter a dollar amount		enter a dollar amount		enter a dollar amount
Total variable		enter a total of the two previous amounts		enter a total of the two previous amounts		enter a total of the two previous amounts
Contribution margin		enter a dollar amount		enter a dollar amount		enter a dollar amount
Fixed costs
Cost of goods sold		enter a dollar amount		enter a dollar amount		enter a dollar amount
Operating expenses		enter a dollar amount		enter a dollar amount		enter a dollar amount
Total fixed		enter a total of the two previous amounts		enter a total of the two previous amounts		enter a total of the two previous amounts
Net income (loss)		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount

Answer 1

	Continue	Eliminate	Net Income
Sales	100,000		(100,000)
Variable Cost
Cost of Goods Sold	60,100		60,100
Operating expenses	29,200		29,200
Total Variable Cost	89,300		89,300
Contribution Margin	10,700		(10,700)
Fixed Cost
Cost of Goods Sold	16,500	16,500	-
Operating expenses	21,200	21,200	-
Total Fixed	37,700	37,700	-
Net Income/ (Loss)	(27,000)	(37,700)	(10,700)

Veronica Is incorrect

In eliminating the Percy Division the net loss increases by $ 10,700 .