The Kelsh Company has two divisions--North and South. The divisions have the fol

Question

The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses: North South Sales $900,000 $800,000 Variable expenses 450,000 300,000 Traceable fixed expenses 260,000 210,000 Allocated common corporate expenses 240,000 190,000 Net operating income (loss) ($50,000) $100,000 Management at Kelsh is pondering the elimination of the North Division. If the North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given this data, you will advise:

A. To eliminate North division, as the company profitability will immediately improve by $50,000.

B. To keep North division, as its elimination will turn the company from profitable to unprofitable.

C. To keep North division, as its elimination will be too complicated and will bring just a little improvement in company’s profitability.

D. To eliminate North division, as the company profitability will improve by $260,000.

Explanation / Answer

Company profit = North division + South division

= (50,000) + 100,000

= 50,000

If the North division is eliminated the total of common corporate costs of 430,000(240,000+190,000) will be South division costs and the company profit will be -140,000 (800,000-300,000-210,000-430,000)

The company will incurr a loss of 140,000 if the north division is eliminated.

The answer is B.

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