Judy Herzog, a recent graduate of Rolling\'s accounting program, evaluated the o
ID: 2350572 • Letter: J
Question
Judy Herzog, a recent graduate of Rolling's accounting program, evaluated the operating performance of Klumpe Company's six divisions. Judy made the following presentation to Klumpe Board of Directors and suggested the Ketchum Division be eliminated. "If the Ketchum Division is eliminated," she said, "our total profits would increase by $16,870".The Other
Five Divisions
Ketchum
Division
Total
Sales $1,664,200 $98,200 $1,762,400
Cost of goods sold 978,520
76,470
1,054,990
Gross profit 685,680 21,730 707,410
Operating expenses 527,940
38,600
566,540
Net income $157,740
$(16,870)
$140,870
In the Ketchum Division, cost of goods sold is $56,000 variable and $20,470 fixed, and operating expenses are $12,000 variable and $26,600 fixed. None of the Ketchum Division's fixed costs will be eliminated if the division is discontinued.
Instructions
Is Judy right about eliminating the Ketchum Division? Complete the following incremental analysis to support your answer. (If an amount should be blank, enter a zero. All boxes must be filled to be correct. If amount decreases net income, use either a negative sign preceding the number eg -45 or parentheses eg (45). If a net loss, record amount using either a negative sign preceding the number eg -45 or parentheses eg (45).)
Continue Eliminate Net Income
Increase
(Decrease)
Sales $
$
$
Variable expenses
Cost of good sold
Operating expenses
Total variable
Contribution margin
Fixed expenses
Cost of goods sold
Operating expenses
Total fixed
Net Income (loss) $
$
$
Judy is correctincorrect.
Explanation / Answer
Continue
Eliminate
Net Income (increase or decrease)
Sales
98,200
0
-98,200
Variable:
COGS
56,000
0
56,000
OE
12,000
0
12,000
Total Variable
68,000
0
68,000
Contribution Margin
30,200
0
-30,200
Fixed:
COGS
20,470
20,470
0
OE
26,600
26,600
0
Total Fixed
47,070
47,070
0
Net Income
-16,870
-47,070
-30,200
Judy is incorrect.
Continue
Eliminate
Net Income (increase or decrease)
Sales
98,200
0
-98,200
Variable:
COGS
56,000
0
56,000
OE
12,000
0
12,000
Total Variable
68,000
0
68,000
Contribution Margin
30,200
0
-30,200
Fixed:
COGS
20,470
20,470
0
OE
26,600
26,600
0
Total Fixed
47,070
47,070
0
Net Income
-16,870
-47,070
-30,200
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