Question

Debra King, a recent graduate of Bell's accounting program, evaluated the operating performance of Cullumber Company's six divisions. Debra made the following presentation to Cullumber'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 $26,200." The Other Percy Five Divisions Division Total Sales $1,663,000 $100,100 $1,763,100 Cost of goods sold 1,055,400 978,600 76,800 23,300 Gross profit 684,400 707,700 575,500 Operating expenses 526,000 49,500 $158,400 (26,200) $132,200 Net income In the Percy Division, cost of goods sold is $59,300 variable and $17,500 fixed, and operating expenses are $31,400 variable and $18,100 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued Is Debra right about eliminating the Percy Division? Prepare parentheses e.g. (45).) schedule to support your answer. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or Net Income Increase Eliminate (Decrease) Continue 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)

Answer 1

Answer:

The schedule to show the comparison of costs in case Percy division is continued and discontinued are as follows:

Percy division
Particulars	Continue	Eliminate	Net income increase/(decrease)
Sales	$ 1,00,100.00	$                  -	$                   1,00,100.00
Variable costs:
Cost of goods sold: Variable-	$   -59,300.00	$                  -	$                     -59,300.00
Operating expenses: Variable	$   -31,400.00	$                  -	$                     -31,400.00
Total variable cost	$   -90,700.00	$                  -	$                     -90,700.00
Contribution margin	$       9,400.00	$                  -	$                         9,400.00
Fixed costs:
Cost of goods sold: Fixed	$   -17,500.00	$ -17,500.00	$                                      -
Operating expense: Fixed	$   -18,100.00	$ -18,100.00	$                                      -
Total fixed costs	$   -35,600.00	$ -35,600.00	$                                      -
Net income/(loss)	$   -26,200.00	$ -35,600.00	$                         9,400.00

As per the above schedule, we found that the fixed costs cannot be removed if the division is discontinued. So, accordingly we see, that if the division is continued, the loss value is $ 26,200 whereas if it is doscontinued, the loss value is higher i.e $ 35,600. So it is better to continue the division since, continuation will save $9,400.

Hence, Debra is wrong with the suggestion.

Asnwer: The Percy division should be continued since it will save $9,400.