Question

Veronica Mars, a recent graduate of Bell's accounting program, evaluated the operating performance of Dunn Company's six divisions. Veronica made the following presentation to Dunn'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 $26,600." ok Sales Cost of goods sold Gross profit Operating expenses Net income The Other Percy Five Divisions Division $1,664,000 $100,000 978,000 76,900 686,000 23,100 526,300 49,700 $159,700 $ 126,600) Total $1.764,000 1,054,900 709,100 576,000 $133,100 In the Percy Division, cost of goods sold is $60,800 variable and $16,100 fixed, and operating expenses are $31,600 variable and $18,100 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Is Veronica 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.s. (45).) Continue Eliminate Net Income Increase (Decrease) 100,500.00 2 Sales 100,500.00 L / 1 / / // / / / A 1 59,400 30100 IN IN / 59,400 30100 89,500 11000 / NM / / 89,500 W / III Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed D Net Income (loss) 1 11000 1 / / 1 / / / / / 17300 / 1 // // // 17,300 20300 20300 0 0 1 26,600 $ 37,600 37,600 $ -37600 11000 Veronica is incorrect

Answer 1

Solution:

Differential Analysis - Dunn Company
Particulars	Continue Percy Division	Eliminate Percy Division	Net Income Increase (Decrease)
Sales	$100,000.00	$0.00	-$100,000.00
Variable Costs:
Cost of Goods Sold	$60,800.00	$0.00	-$60,800.00
Opearting Expenses	$31,600.00	$0.00	-$31,600.00
Total Variable	$92,400.00	$0.00	-$92,400.00
Contribution Margin	$7,600.00	$0.00	-$7,600.00
Fixed Costs:
Cost of Goods Sold	$16,100.00	$16,100.00	$0.00
Opearting Expenses	$18,100.00	$18,100.00	$0.00
Total Fixed	$34,200.00	$34,200.00
Net Income (Loss)	-$26,600.00	-$34,200.00	-$7,600.00

As there is net financial disadvantage of $7,600 on elimination of percy division, therefore Veronica is incorrect about eliminating the Percy division.