Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $6,000. The division sales for the year were $1,060,000 and the variable costs were $863,000. The fixed costs of the division were $203,000. 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:

loss of $137,000.

Explanation:

Analysis of effects of eliminating business segment

Income :

Savings - Variable Costs                                  $863,000

Savings - Fixed Cost ($203,000 x 30%)           $60,900

Total Income                                                     $923,900

Costs :

Lost Sales                                                      $1,060,000

Total Costs                                                     $1,060,000

Financial Advantage/ (Disadvantage)            ($137,000)

therefore,

The impact on operating income for eliminating this business segment would be: loss of $137,000.