Question

A recent accounting graduate from SFU evaluated the operating performance of Gibco Company's three divisions. The following presentation was made to management where she recommended eliminating the Western Division because net income would increase by $15,000, as shown in the analysis below. North and South Divisions Western Division Total Sales $1,000,000 $305,000 $1,305,000 Cost of Goods Sold 650,000 200,000 850,000 Gross Profit 350,000 105,000 455,000 Operating Expenses 100,000 120,000 220,000 Net Income $ 250,000 $ (15,000) $ 235,000 Cost of goods sold is 75% variable and operating expenses are 70% variable. If the Western division is eliminated, 45% of the fixed costs in COGS and operating expenses related to the Western division will be eliminated. Instructions Do you concur with the recommendation? Present an “after elimination” income statement to support your answer AND present an incremental approach calculation.

Answer 1

Income Statement after elimination
	North & South
Total Sales		$            10,00,000.00
Less:Variable expenses:
Cost of goods sold($650,000*75%)	$              4,87,500.00
Operating expenses($100,000*70%)	$                 70,000.00	$              5,57,500.00
Contribution Margin		$              4,42,500.00
Less:Fixed expenses(Note)
Cost of goods sold(including west)	$              1,90,000.00
Operating expenses(including west)	$                 49,800.00	$              2,39,800.00
Net Income		$              2,02,700.00
Note:
Fixed Cost of goods sold of North & South	$              1,62,500.00
Fixed Operating expenses of North & South	$                 30,000.00
Fixed COGS of West not eliminated($200,000*25%*55%)	$                 27,500.00
Fixed Operating expenses of West not eliminated($120,000*30%*55%)	$                 19,800.00
Income Statement under Incremental approach
Sales(1,000,000-$1,350,000)	$             -3,05,000.00
Variable expenses	$              2,34,000.00
Contribution Margin	$                -71,000.00
Savings in Fixed expenses	$                 38,700.00
Loss in Net Income	$                -32,300.00
So if the West division is eliminated then there is a loss of Net Income of $32,300($235,000-$202,700)