Question

Question 2 Answer saved Marked out of 2.00p Flag question Dropping Unprofitable Department Thomas Corporation has four departments, all of which appear to be profitable except department 4. Operating data for 2019 are as follows: Total Departments 1-3 Department 4 Sales $1,000,000 $900,000 $100,000 Cost of sales 631,000 558,000 73,000 Gross profit 369,000 342,000 27,000 Direct expenses $144,000 $120,000 $24,000 Common expenses 107,000 96,000 11,000 Total expenses 251,000 216,000 35,000 Net income (Loss) $118,000 $126,000 $(8,000) Required a. Calculate the gross profit percentage for departments 1-3 combined and for department 4. Department 1- 30 % Department 4 0 % b. What effect would elimination of department 4 have had on total firm net income? (Ignore the effect of income tax.) The firm's net income would be: $ 0

Answer 1

A) gross profit%

Dept 1- 3 = $342000/$900000*100 = 38%

Dept 4 = $27000/$100000*100 = 27%

B) Dept 4 is earning ($11000-$8000) = $3000 before deducting common expense.

Even if we do eliminate department 4 , common expense won't change so eliminating Dept 4 will lead to reduction in total net income of $3000

So net income will be $118000 - $3000 = $115000.

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