Question

Bramble Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Bramble 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.” The Other Five Divisions Percy Division Total Sales $1,663,000 $100,400 $1,763,400 Cost of goods sold 978,800 76,900 1,055,700 Gross profit 684,200 23,500 707,700 Operating expenses 526,200 50,100 576,300 Net income $158,000 $ (26,600 ) $131,400 In the Percy Division, cost of goods sold is $59,300 variable and $17,600 fixed, and operating expenses are $29,200 variable and $20,900 fixed. None of the Percy Division’s fixed costs will be eliminated if the division is discontinued. Is Bramble right about eliminating the Percy Division?

Answer 1

					Continue	Eliminate	Net income increase (decrease)
	Sales				1763400	1663000	-100400
	Cost of goods sold				1055700	996400	59300
	(Variable portion is reduced)					(1055700-59300)
	Gross profit				707700	666600	-41100
	Operating expenses				576300	547100	29200
	(Variable portion is reduced)					(576300-29200)
	Net income (loss)				131400	119500	-11900
	Bramble is not right about elliminating percy division since it will result in $11900 reduction in net income