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 North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of: $100,000 SI 50.000 $(140,000) $30,000

Explanation / Answer

Effect on Company's overall net operating income if North division is eliminated Decrease in net income due to fall in contribution margin -$4,50,000 Decrease in net income by avoiding traceable fixed expenses $2,60,000 Decrease in Company's overall Net Operating Income -$1,90,000 Company's overall Net operating income before elimination of North division $50,000 Less : Decrease in Company's overall Net Operating Income due to elimination -$1,90,000 Company's overall Net operating income after elimination of North division -$1,40,000 The answer is option C i.e.$(140000)

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