Maggie Sharrer, a recent graduate of Rolling\'s accounting program, evaluated th

Question

Maggie Sharrer, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions. Maggie made the following presentation to Poway's Board of Directors and suggested the Erie Division be eliminated. “If the Erie Division is eliminated,” she said, “our total profits would increase by $24,500.”
The Other Five Divisions Erie Division Total
Sales $1,664,200 $100,000 $1,764,200
Cost of goods sold 978,520 76,500 1,055,020
Gross profit 685,680 23,500 709,180
Operating expenses 527,940 48,000 575,940
Net income $ 157,740 $(24,500) $ 133,240

In the Erie Division, cost of goods sold is $60,000 variable and $16,500 fixed, and operating expenses are $25,000 variable and $23,000 fixed. None of the Erie Division's fixed costs will be eliminated if the division is discontinued.
Would you discontinue, why?

Explanation / Answer

Yes. It is better to discontinue. Incremental analysis- Eliminating an unprofitable segment: Details Continue Eliminate Net Income Increase/Decrease Sales $100,000 $0 ($100,000) Variable costs (60,000 + 25,000) 85,000 $0 85,000 Contribution margin 15,000 $0 -15,000 Fixed costs     (16,500+23,000) 39,500 39,500 0 Net income ($24,500) ($39,500) ($15,000) Details Continue Eliminate Net Income Increase/Decrease Sales $100,000 $0 ($100,000) Variable costs (60,000 + 25,000) 85,000 $0 85,000 Contribution margin 15,000 $0 -15,000 Fixed costs     (16,500+23,000) 39,500 39,500 0 Net income ($24,500) ($39,500) ($15,000) Details Continue Eliminate Net Income Increase/Decrease Sales $100,000 $0 ($100,000) Variable costs (60,000 + 25,000) 85,000 $0 85,000 Contribution margin 15,000 $0 -15,000 Fixed costs     (16,500+23,000) 39,500 39,500 0 Net income ($24,500) ($39,500) ($15,000)

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