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 $26,600.”

		The Other Five Divisions		Percy Division			Total
Sales		$1,664,000		$100,000			$1,764,000
Cost of goods sold		978,000		76,900			1,054,900
Gross profit		686,000		23,100			709,100
Operating expenses		526,300		49,700			576,000
Net income		$159,700		$ (26,600	)		$133,100

In the Percy Division, cost of goods sold is $60,800 variable and $16,100 fixed, and operating expenses are $31,600 variable and $18,100 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).)

		Continue		Eliminate		Net Income Increase (Decrease)
Sales		$enter sales in dollars		$enter sales in dollars		$enter sales in dollars
Variable costs
Cost of goods sold		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars
Operating expenses		enter operating expenses in dollars		enter operating expenses in dollars		enter operating expenses in dollars
Total variable		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts
Contribution margin		enter contribution margin in dollars		enter contribution margin in dollars		enter contribution margin in dollars
Fixed costs
Cost of goods sold		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars		enter the cost of goods sold in dollars
Operating expenses		enter operating expenses in dollars		enter operating expenses in dollars		enter operating expenses in dollars
Total fixed		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts
Net income (loss)		$enter net income or loss in dollars		$enter net income or loss in dollars		$enter net income or loss in dollars

Answer 1

	Continue	Eliminate	Net income - Increase / (Decrease)
Sales	$1,00,000	$0	-$1,00,000
Less: Variable costs
Cost of goods sold	$60,800	$0	$60,800
Operating expenses	$31,600	$0	$31,600
Total variable costs	$92,400	$0	$92,400
Contribution margin	$7,600	$0	-$7,600
Less: Fixed costs
Cost of goods sold	$16,100	$16,100	$0
Operating expenses	$18,100	$18,100	$0
Total fixed costs	$34,200	$34,200	$0
Net income (loss)	-$26,600	-$34,200	-$7,600
Hence, Veronica is incorrect since eliminating the Percy Division would result in a decrease in the net income by $7,600.