Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $4,000. The division sales for the year were $1,058,000 and the variable costs were $861,000. The fixed costs of the division were $201,000. 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:

The impact on operating income for eliminating this business segment would be $136,700

Explanation:

For computing the eliminating operating income, the equation should be used which is shown below:

= Sales revenue - variable cost - fixed cost

where,

Sales revenue is $1,058,000

variable cost is $861,000

And, the fixed cost is $201,000 out of which 30% is allocated to the eliminated division, So, we have to find only 30% of fixed cost which is equal to

= $201,000 × 30%

= $60,300

Now, apply these values to the above equation which is equal to

= $1,058,000 - $861,000 - $60,300

= $136,700

The operating loss is of no use so it is ignored.

Hence, the impact on operating income for eliminating this business segment would be $136,700