Question

Sheffield Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Sheffield 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 $25,500.”

		The Other Five Divisions		Percy Division			Total
Sales		$1,665,000		$100,700			$1,765,700
Cost of goods sold		978,100		76,600			1,054,700
Gross profit		686,900		24,100			711,000
Operating expenses		528,100		49,600			577,700
Net income		$158,800		$ (25,500	)		$133,300

In the Percy Division, cost of goods sold is $60,000 variable and $16,600 fixed, and operating expenses are $30,700 variable and $18,900 fixed. None of the Percy Division’s fixed costs will be eliminated if the division is discontinued.

Is Sheffield 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		$		$		$
Variable costs
Cost of goods sold
Operating expenses
Total variable
Contribution margin
Fixed costs
Cost of goods sold
Operating expenses
Total fixed
Net income (loss)		$		$		$

Sheffield is incorrectcorrect

Answer 1

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		$100700		$0		-100700
Variable costs
Cost of goods sold		-60000				60000
Operating expenses		-30700				30700
Total variable		-90700				90700
Contribution margin		10000				-10000
Fixed costs
Cost of goods sold		-16600		-16600		0
Operating expenses		-18900		-18900		0
Total fixed		-35500		-35500		0
Net income (loss)		-25500		-35500		$-10000

Yes, Sheffield is

incorrect