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 $27,200.”

		The Other Five Divisions		Percy Division			Total
Sales		$1,665,000		$100,100			$1,765,100
Cost of goods sold		977,400		76,900			1,054,300
Gross profit		687,600		23,200			710,800
Operating expenses		528,700		50,400			579,100
Net income		$158,900		$ (27,200	)		$131,700

In the Percy Division, cost of goods sold is $60,000 variable and $16,900 fixed, and operating expenses are $30,800 variable and $19,600 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.

Answer 1

Particulars	continue	Eliminate	Net income increase (decrease)
Sales	$100,100	0	($100,100)
Less: variable cost
Cost of goods sold	($60,000)	0	$60,000
Operating expenses	($30,800)	0	$30,800
Contribution margin	$9,300	0	($9,300)
Less: fixed cost
Cost of goods sold	($16,900)	($16,900)	0
Operating expenses	($19,600)	($19,600)	0
Net income (loss)	($27,200)	($36,500)	($9,300)

Veronica is not right about eliminating percy division since there is an increase in loss of ($9,300) by eliminating percy division.

Note:

Percy division fixed costs will continue to incurr even if the division is discontinued.