Question

XYZ Limited makes beds in three sizes: twin, queen and king. Twin beds have shown a loss for several years, similar to the operating loss shown below:

	Twin	Queen	King
Sales	$150,000	$250,000	$280,000
Variable costs	75,000	150,000	190,000
Contribution margin	75,000	100,000	90,000
Fixed costs	80,000	80,000	80,000
Operating income	($ 5,000)	$ 20,000	$ 10,000

None of the fixed costs are avoidable. What will be the total operating income for the corporation if twin beds are discontinued?

	a.	$15,000 loss
	b.	$50,000 loss
	c.	$30,000 profit
	d.	$105,000 profit

A common error managers make in deciding to close a division is allowing

	a.	allocated fixed costs to influence the decision.
	b.	avoidable costs to influence the decision.
	c.	customer needs and desires to influence the decision.
	d.	qualitative issues to influence the decision.

Answer 1

Q.1	Correct Option c. $30,000 profit
	Calculation of total operating income if twin is Continued
		Twin	Queen	King	Total
	Sales	150,000	250,000	280,000	680,000
	Variable costs	75,000	150,000	190,000	415,000
	Contribution margin	75,000	100,000	90,000	265,000
	Fixed costs	80,000	80,000	80,000	240,000
	Operating income	(5,000)	20,000	10,000	25,000
	Calculation of total operating income if twin is Discontinued
		Queen	King	Total
	Sales	250,000	280,000	530,000
	Variable costs	150,000	190,000	340,000
	Contribution margin	100,000	90,000	190,000
	Fixed costs	120,000	120,000	240,000
	Operating income	20,000	10,000	30,000
Q,2	Correct Option a. allocated fixed costs to influence the decision.
	Allocated cost are those cost which are traceable to a particular segment but will continue to occur even if segment is discontinued.