Question

Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,700. The division sales for the year were $973,300 and the variable costs were $482,000. The fixed costs of the division were $534,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's operating income for eliminating this business segment would be:

Answer 1

Answer:

The impact on Granfield's operating income = 277,700 decrease

Explanation:

If the backpack division is eliminated, the following effect will occur on the company's processes:

loss of sales from backpack division (Revenue lost)= $973,300

Variable cost to be eliminated = $482,000

Fixed cost to be eliminated = 40% of 534,000 = 40/100 × 534,000

= 0.4 × 534,000 = $213,600

Total cost eliminated ( Revenue gained) = variable cost + fixed cost

Total cost eliminated ( Revenue gained) = 482,000 + 213,600 = $695,600

Therefore, collective impact on the company is calculated as follows:

Revenue lost - Revenue gained = 973,300 - 659,600 = $277,700

Therefore, since a net revenue lost = $277,700, it means that the operating income will decrease by  $277,700.