Question

The Cook Corporation has two divisions--East and West. The divisions have the following revenues and expenses:

	East			West
Sales	$	585,000		$	473,000
Variable costs		174,000			228,300
Traceable fixed costs		145,500			207,000
Allocated common corporate costs		131,000			176,800
Net operating income (loss)	$	134,500		$	(139,100	)

The management of Cook is considering 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, the elimination of the West Division would result in an overall company net operating income (loss) of:

Multiple Choice

• $134,500

• $(42,300)

• $(139,100)

• $(4,600)

Answer 1

Answer:

Option B: $ (42,300)

Explanation:

When the department is continued, the loss = $ 130,100

If the department is discontinued, the sales, variable costs and traceable fixed costs will become zero. Allocated overhead cost will still be incurred. So, the loss will be 176,800.

The overall company Net Income = $ 134,500 (-) $ 176,800

= $ (42,300)

Hence,

Option 'B' is correct and rest all are incorrect.

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