Question

E12-15 Use incremental analysis concerning elimination of division.

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 $26,000."

The Other

Percy

Five Divisions

Division

Total

Sales

$1,664,200

$100,000

$1,764,200

Cost of goods sold

978,520

76,000

1,054,520

Gross Profit

685,680

24,000

709,680

Operating expenses

527,940

50,000

577,940

Net income

$157,740

($26,000)

$131,740

In the Percy Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses

are $30,000 variable and $20,000 fixed. None of the Percy Division's fixed costs will be eliminated if the

division is discontinued.

Instructions

Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer.

NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .

	Continue	Eliminate	Net income Increase (Decrease)
Sales	Value	Value	Value
Variable costs
Cost of goods sold	Value	Value	Value
Operating expenses	Value	Value	Value
Total variable	?	?	?
Contribution margin	?	?	?
Fixed costs
Cost of goods sold	Value	Value	Value
Operating expenses	Value	Value	Value
Total fixed	?	?	?
Net income (loss)	?	?	?

Answer 1

Solution :

Differential Analysis - Dunn Company
Particulars	Continue Percy Division	Eliminate Percy Division	Net Income Increase (Decrease)
Sales	$100,000.00	$0.00	-$100,000.00
Variable Costs:
Cost of Goods Sold	$61,000.00	$0.00	-$61,000.00
Opearting Expenses	$30,000.00	$0.00	-$30,000.00
Total Variable	$91,000.00	$0.00	-$91,000.00
Contribution Margin	$9,000.00	$0.00	-$9,000.00
Fixed Costs:
Cost of Goods Sold	$15,000.00	$15,000.00	$0.00
Opearting Expenses	$20,000.00	$20,000.00	$0.00
Total Fixed	$35,000.00	$35,000.00
Net Income (Loss)	-$26,000.00	-$35,000.00	-$9,000.00

As there is decrease in income fo $9,000 on eliminiation of percy division, therefore veronica is not right about eliminating the Percy Division.