Question

Exercise 20-15 (Video) Ruth Lewis, a recent graduate of Bell's accounting program, evaluated the operating performance of Sunland Company's six divisions. Ruth made the following presentation to Sunland'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 $26,100." Sales Cost of goods sold Gross profit Operating expenses Net income The Other Percy Five Divisions Division $1,664,000 $100,300 977,900 76,300 686,100 24,000 528,000 50,100 $158,100 $ (26,100) Total $1,764,300 1,054,200 710,100 578,100 $132,000 In the Percy Division, cost of goods sold is $59,300 variable and $17,000 fixed, and operating expenses are $31,600 variable and $18,500 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Is Ruth right about eliminating the Percy Division? Prepare a schedule to support your answer. (Enter negative amounts using either a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Net Income Increase (Decrease) Continue Eliminate 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) Ruth is

Answer 1

Percy Divison	Continue	Eliminate
Sales	100,300	-
Variable Costs
COGS	59,300	-
Opearting Exp	31,600
Total Variable	90,900
Contribution Margin	9,400
Fixed Costs
COGS	17,000	17,000
Operating Exp	18,500	18,500
Total Fixed cost	35,500	35,500
Net Income/(Loss)	(26,100)	(35,500)	(9,400)
The elimination idea is not good as it will increase the loss by $9400(i.e. the contribution Margin)