Question

# E12-15 Use incremental analysis concerning elimination of division. Veronica Mars, a recent graduate of Bell's accounting...

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

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) ? ? ?

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.