Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and the variable costs were $860,000. The fixed costs of the division were $193,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

Answer 1

Answer:

Decrease by $132,100

Explanation:

Computation of the given data are as follow:-

We can calculate the  Operating Income by using following formula:-

Fixed Cost = Fixed Cost * Dropped Rate

= $193,000 * 30/100

= $57,900

So, Operating Income = Sales - Variable Cost - Fixed Cost  

= $,1050,000 - $860,000 - $57,900

= $132,100

According to the Analysis, the operating income will be decrease by $132,100 if the business segment is eliminated.