Question

Instructions Prepare an incremental analysis to determine whether the current machine should be replaced. E7.15 (LO 6), AN 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 $26,000. The Other Five Divisions Percy Division Total $100,000 $1,764,200 Sales $1,664,200 Cost of goods sold Gross profit 978,520 76,000 1,054,520 685,680 24,000 709,680 50,000 Operating expenses 527,940 577,940 Net income $157,740 $(26,000) S 131,740 Use incremental analysis concerning elimination of division. Escel In the Percy Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses are $30,000 variable and $20,000 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Instructions Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer.

Answer 1

Incremental analysis

	Continue	Eliminate	Net income increase (decrease)
Revenue	100000		-100000
Less: Variable cost
Cost of goods sold	-61000		61000
Operating expense	-30000		30000
Total Variable cost	-91000		91000
Contribution margin	9000	0	-9000
Less: Fixed cost
Cost of goods sold	-15000	-15000	0
Operating expense	-20000	-20000	0
Total Fixed cost	-35000	-35000	0
Operating income	-26000	-35000	-9000

No Veronica is not right