Question

The Other Five Divisions Deluxe Division Total Sales $1,664,200 200,000 $1,864,200 Cost of goods sold 978,520 156,000 1,134,520 Gross profit 685,680 44,000 729,680 Operating expenses 527,940 80,000 607,940 Net income $ 157,740 S(36,000) $ 121,740 In the Deluxe Division, cost of goods sold is $91,000 variable and $65,000 fixed, and operating expenses are $46,000 variable and $34.000 fixed. If the division is discontinued, all variable costs and $30,000 of the Deluxe Division's fixed operating expenses will be eliminated. Instructions What is the impact of eliminating Deluxe Division on total net income? Do you concur with John's recommendation? Perform an incremental analysis to support your answer. (1) Net Income Keep Eliminate Increase Deluxe Deluxe (Decrease) Sales of Deluxe Div. Deluxe's variable costs Cost of goods sold Operating expenses Total variable Contribution margin Deluxe's fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss) John is . Net income will be Division is eliminated. _Deluxe. Lif the Deluxe (2) Keep Deluxe Division if its net loss is smaller than its fixed costs that cannot be eliminated and will drag down the other divisions' profit. Net loss of Deluxe Division Its fixed costs that cannot be eliminated VS VS

Answer 1

1	Statement of Net Income
		Keep Deluxe	Eliminate Deluxe	Net Income Increase/(Decrease)
	Sales of Deluxe Div	$2,00,000	$0	-$2,00,000
	Deluxes Variable cost:
	Cost of goods sold	$91,000	$0	$91,000
	Operating expenses	$46,000	$0	$46,000
	Total Variable	$1,37,000	$0	$1,37,000
	Contribution margin	$63,000	$0	-$63,000
	Deluxes Fixed cost:
	Cost of goods sold	$65,000	$35,000	$30,000
	Operating expenses	34000	$34,000	$0
	Total Fixed	$99,000	$69,000	$30,000
	Net Income/(Loss)	-$36,000	-$69,000	-$33,000
	As we can see that by eliminating the Deluxe Division there is decrease in Net income of $33,000.
	John is wrong in his decision and Deluxe Division should be kept
2	Net Loss of Deluxe Division	Its fixed cost that cannot be eliminated
	$36,000	$69,000
	As we can see that the net loss is smaller than Its fixed cost that cannot be eliminated hence it should be kept