Question

The ABC Corporation has 2 divisions - east and west. The divisions have the following revenues and expenses:

	East	West
Sales	$720,000	$350,000
Variable costs	370,000	240,000
Traceable fixed costs	130,000	80,000
Allocated common corporate costs	120,000	50,000
Net operating income (loss)	$100,000	-$20,000

Management is thinking of the elimination of the West division. If the west division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, should the west division be eliminated? Why or why not? Show your work to support your decision.

Answer 1

answer: it should not be eliminated because net operating income reduced from $80,000 to $50,000 , if it is eliminated

	East division
sales	$720,000
variable costs	370,000
traceable fixed costs	130,000
allocated common corporate costs =$120,000+50,000	170,000
net operating income (loss)	$50,000

explanation

net operating income of the ABC corporation before eliminating west division = $80,000

after eliminating the west division net operating profit of ABC Corporation is $50,000  

so net operating income reduced from $80,000 to $50,000 , if WEST division is eliminated

the reason is allocated common corporate costs could not be eliminated , so it reduces the net operating profit of EAST division