Question

Vanik Corporation currently has two divisions which had the following operating results for last year: Cork Division Rubber Division Sales $ 600,000 $ 350,000 Variable costs 250,000 220,000 Contribution margin 350,000 130,000 Traceable fixed costs 160,000 110,000 Segment margin 190,000 20,000 Allocated common corporate fixed costs 80,000 45,000 Net operating income (loss) $ 110,000 $ (25,000 ) Because the Rubber Division sustained a loss, the president of Vanik is considering the elimination of this division. All of the division’s traceable fixed costs could be avoided if the division was dropped. None of the allocated common corporate fixed costs could be avoided. If the Rubber Division was dropped at the beginning of last year, the financial advantage (disadvantage) to the company for the year would have been: Multiple Choice ($20,000) $20,000 $25,000 ($25,000)

Answer 1

Answer:

With the escenario projected the financial disadvantage would have been :

($20,000)

Explanation:

This is the actual situation of the company where it gets a consolidated income of $85,000

CORK         RUBBER Total           Income Statement

$ 600,000 $ 350,000 $ 950,000 Total Net Sales

-$ 250,000 -$ 220,000 -$ 470,000 Variable Cost

$ 350,000 $ 130,000 $ 480,000 Operating Income

-$ 160,000 -$ 110,000 -$ 270,000 Traceable Fixed Costs

$ 190,000 $ 20,000 $ 210,000 Income Before Tax Expenses

-$ 80,000 -$ 45,000 -$ 125,000 Allocated Common Cost

$ 110,000 -$ 25,000 $ 85,000 Net Income

If the company implements the dropp of the Rubber division, it will generate a

disadvantage of ($20,000) because of the Allocated Common Cost.

It will be the projected escenario.

CORK      RUBBER  Total        Income Statement

$ 600,000 $ 0,000    $ 600,000 Total Net Sales

-$ 250,000 $ 0,000   -$ 250,000 Variable Cost

$ 350,000 $ 0,000   $ 350,000 Operating Income

-$ 160,000 $ 0,000   -$ 160,000 Traceable Fixed Costs

$ 190,000 $ 0,000   $ 190,000 Income Before Tax Expenses

-$ 80,000 -$ 45,000 -$ 125,000 Allocated Common Cost

$ 110,000 -$ 45,000 $ 65,000 Net Income

                               Disadvantage   ($ 20,000)