Question

Chao, Inc., a service provider, has two divisions. The firm's most recent annual contribution format segmented income statement appears below Total Eastern Company Division Division $450,000 $90,000 $360,000 27,000 63,000 46,800 106,200 $16,200 90,000 Western Sales Variable expenses Contribution margin Traceable fixed expenses Division segment margin Common fixed expenses Net operating income 243,000 207,000 100,800 216,000 144,000 54,000 72,000 34,200 If the company eliminates the Western Division and the Eastern Division sales increase by 10% as a result, how much will the company's net operating income decrease? $83,700 $88,380 $90,000 $137,700

Chao, Inc., a service provider, has two divisions. The firm’s most recent annual contribution format segmented income statement appears below.

If the company eliminates the Western Division and the Eastern Division sales increase by 10% as a result, how much will the company’s net operating income decrease?

Answer 1

Eastern division's variable expense ratio = Variable expense / Sales = $27000 / $90000 = 30%

Calculation of Company's net operating income if it eliminates the western division and the Eastern divisions sales increase by 10% :

Sales [ $90000 + 10% ]	$99000
Variable expenses (30%)	$29700
Contribution margin	$69300
Total fixed costs [ $46800 + $72000 ]	$118800
Net operating income ( loss )	( $49500 )

Decrease in Net operating income = Current net operating income - Net operating income after elimination = $34200 - ( - $49500 ) = $34200 + $49500 = $83700