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 \$ 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

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)

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