An accounting intern from Moon College evaluated the operating performance of Lo

Question

An accounting intern from Moon College evaluated the operating performance of Long's Inc. The folowing presentation was made to Long's Board of Drectors During the presentation, the accountant made the recommendation to eliminate the Exercise/Spa Division stating that total net income would increase by $60,000 (See analysis below) Sales Cost of Goods Sold Gross Proft Operating Expenses Net Income $480,000 400.000 80,000 140.000 $ (60.000) $2,000,000 $2.480,000 950.000 1,050,000 1130,000 0.000 S 250,000 For the other four disions, cost of goods sold is 75% variable and operating expenses are 80% variable The cost of goods sold for the Exercises a Division 40% fixed, and its operating expenses are 70% fixed if the division is eliminated, only S20.000 of the fixed operating costswil be eliminated Instructions Present the analysis in a table. Do you concur with the accounting intern's recommendation? Present a schedule to support your answer

Explanation / Answer

If Excercise /spa division gets eliminated:

Other four division excercise / spa Total

sales     2000000 0 2000000

cost of goods sold (950000) 160000 (400000*40%)    (1110000 )

Gross profit 1050000 (160000) 890000

operating expenses (800000) (78000) (140000*70%-20000) (878000)

Net income 250000 (238000) 12000

No, the Excercise /spa division should not be eliminated ,because it will reduce the net income to $12000 from $190000 that means net income will decrease by $178000 .

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