Question

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

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)

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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