Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the ope
ID: 2519829 • Letter: V
Question
Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the operating performance of Dunn Company’s six divisions. Veronica made the following presentation to Dunn’s board of directors and suggested the Percy Division be eliminated. “If the Percy Division is eliminated,” she said, “our total profits would increase by $24,900.” The Other Five Divisions Percy Division Total Sales $1,665,000 $100,900 $1,765,900 Cost of goods sold 977,500 76,100 1,053,600 Gross profit 687,500 24,800 712,300 Operating expenses 527,500 49,700 577,200 Net income $160,000 $ (24,900 ) $135,100 In the Percy Division, cost of goods sold is $60,400 variable and $15,700 fixed, and operating expenses are $29,100 variable and $20,600 fixed. None of the Percy Division’s fixed costs will be eliminated if the division is discontinued. Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer.
Explanation / Answer
Is Veronica right about eliminating the Percy Division = NO
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Percy Division Sales = 100,900
Percy Division Variable costs = Cost of goods sold + Operating expenses
= 60,400 + 29,100
= 89,500
Percy Division Fixed costs = Cost of goods sold + Operating expenses
= 15,700 + 20,600
= 36,300
Percy Division contribution margin = Sales - Variable costs
= 100,900 - 89,500
= 11,400
Percy Division has no avoidable fixed costs as none of the Percy Division’s fixed costs will be eliminated if the division is discontinued.
Percy Division
Cost anaylsis
Net loss from eliminating Percy Division - 11,400
Lost contribution margin when the division is eliminated (11,400) Savings from avoidable fixed costs 0 Net loss from eliminating Percy Division (11,400)Related Questions
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