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 $25,500."The Other Five Divisions Percy Division TotalSales $1,663,000 $100,000 $1,763,000Cost of goods sold 977,000 76,000 1,053,000Gross profit 686,000 24,000 710,000Operating expenses 526,000 49,500 575,500Net income $160,000 $ (25,500) $134,500In the Percy Division, cost of goods sold is $59,000 variable and $17,000 fixed, and operating expenses are $29,000 variable and $20,500 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 $ $ $ Variable costs Cost of goods sold Operating expenses Total variable Contribution margin Fixed costs Cost of goods sold Operating expenses Total fixed Net income (loss) $ $ $

Is Veronica right, or wrong?

Answer 1

Answer:

Effect on income= -$49,500

They lost the positive contribution margin increased by the fixed costs. Veronica is wrong.

Explanation:

Giving the following information:

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 $25,500.

Percy Division

Sales= $100,000

Cost of goods sold= 76,000

Gross profit= 24,000

Operating expenses= 49,500

Net income= (25,500)

In the Percy Division, the cost of goods sold is $59,000 variable and $17,000 fixed, and operating expenses are $29,000 variable and $20,500 fixed.

None of the Percy Division's fixed costs are avoidable.

Effect on income= -contribution margin - fixed costs

Effect on income= -(100,000 - 88,000) - 37,500= -$49,500

They lost the positive contribution margin increased by the fixed costs.