Question

E7.15 (LO 6), AN Veronica Mars, a recent graduate of Bell's accounting program, evaluated the operat- ing 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 $26,000." | Total $1,764,200 Sales Cost of goods sold Gross profit Operating expenses Net income The Other Five Divisions $1,664,200 978,520 685,680 527,940 $ 157,740 Percy Division $100,000 76,000 24,000 50,000 $ (26,000) 1,054,520 709,680 577,940 $ 131,740 In the Percy Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses are $30,000 variable and $20,000 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Instructions Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer.

Answer 1

Calculation 978520+15000 Sales Less: Cost of gooods sold Gross profit Less: Operating expense Net income after discontinuation Less: Current net income Loss due to discontinuation Amount 1,664,200 993,520 670,680 547,940 122,740 131,740 (9,000) 527940+20000 Explanation: If Percy division is closed then it's fixed cost has to be borne by the other divisions. Thus we have added it's fixed cost to other division's expense. Discontinuing the Percy Division will save the company from the loss of $26,000 created by this division. However it's fixed cost of $15,000+$20,0000=$35,000 which is more than it's loss of $26,000 is to be borne by the other divisons making the overall profit to fall by $9,000. Thus Veronica is wrong as discontinuing the Percy Devision will impose an extra loss of $9,000.