Question

Anderson Document Services, a document creation and copying company, has two departments, Design and Copying. The company’s most recent monthly contribution format income statement follows:

	Department
	Total			Design			Copying
Sales	$	455,000		$	120,000		$	335,000
Variable expenses		279,000			78,000			201,000
Contribution margin		176,000			42,000			134,000
Fixed expenses		76,080			47,550			28,530
Operating income (loss)	$	99,920		$	(5,550	)	$	105,470

A study indicates that $21,875 of the fixed expenses being charged to the Design Department are sunk costs or allocated costs that will continue even if the Design Department is dropped. In addition, the elimination of the Design Department would result in a 5% decrease in the sales of the Copying Department.

Required:

a.	If the Design Department is dropped, what will be the effect on the operating income of the company as a whole?
	operating income ______ by _____

       

b.	Should the Design department be dropped?
	Yes No

Answer 1

a) operating income _decrease_____ by __$23025___

calculation:-

particulars	design($)	copying($)	total($)
sales		318250	318250
variable expenses		190950	190950
contribution margin	0	127300	127300
fixed expenses	21875	28530	50405
operating income(loss)	-21875	98770	76895

1)variable expenses wil be 60% of the sales(201000/335000)

2) allocated fixed expenses wil incur even the department is dropped.

b) NO.

explanation:-

if the design department is closed,the overall profit of the company wil decrease by $23025,hence it is better not to drop the department.