Question

Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica 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 $26,900.” The Other Five Divisions Percy Division Total Sales $1,665,000 $100,600 $1,765,600 Cost of goods sold 978,700 77,000 1,055,700 Gross profit 686,300 23,600 709,900 Operating expenses 527,200 50,500 577,700 Net income $159,100 $ (26,900 ) $132,200 In the Percy Division, cost of goods sold is $59,200 variable and $17,800 fixed, and operating expenses are $31,600 variable and $18,900 fixed. None of the Percy Division’s fixed costs will be eliminated if the division is discontinued. Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

	Continue	Eliminate	Net income increase(decrease)
Sales	100600	0	-100600
Variable costs:
Cost of goods sold	59200	0	59200
Operating expenses	31600	0	31600
Total variable	90800	0	90800
Contribution margin	9800	0	-9800
Fixed expenses
Cost of goods sold	17800	17800	0
Operating expenses	18900	18900	0
Total fixed	36700	36700	0
Net income/(loss)	-26900	-36700	-9800
Veronica is incorrect