Question

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

	East			West
Sales	$	550,000		$	489,500
Variable costs		198,000			258,500
Traceable fixed costs		169,500			194,400
Allocated common corporate costs		117,500			141,100
Net operating income (loss)	$	65,000		$	(104,500	)

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:

A) $(76,100)

B) $(104,500)

C) $(39,500)

D) $65,000

Answer 1

SOLUTION

Option A is correct i.e. West Division would result in an overall company net operating income (loss) of $(76,100).

As per question it is clear that company have net operating income from East division = $65,000

When West division will be closed then revenues, variable costs and traceable fixed costs all will be avoided. Hence these will be zero.

But Allocated common corporate costs of West division $141,100 can not be avoided thus after closing west division, an overall company net operating income (loss) will be as follow:

= $65,000 - $141,100

= $(76,100)

Alternatively it can be calculated as follow:

Particulars	Amount ($)
Sales	550,000
Variable costs	(198,000)
Traceable fixed costs	(169,500)
Total common corporate costs (117,500+141,100)	(258,600)
Net operating income (loss)	(76,100)