. A recent accounting graduate from UNM evaluated the operating performance of H
ID: 2535674 • Letter: #
Question
. A recent accounting graduate from UNM evaluated the operating performance of Hickman Company's three divisions. The following presentation was made to Hickman's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division, stating that total net income would increase by $20,000 as shown in the analysis below.
Other Two Divisions Southern Division Total
Sales $1,000,000 $300,000 $1,300,000
Variable Costs 557,500 234,000 791,500
Contribution Margin 442,500 66,000 508,500
Fixed Costs 192,500 86,000 278,500
Net Income $ 250,000 $ (20,000) $ 230,000
If the division is eliminated, 40% of the fixed costs will be eliminated.
Instructions
A) Do you concur with the new accountant's recommendation? Show your work to support your answer.
Explanation / Answer
Incremental Analysis: Loss of revenue of Southern division -300000 Less: Savings in cost Savings in variable cost 234000 Savings in Fixed cost of division 34400 (86000*40%) Net incremental loss on discontinuance -31600 No, Southern division shall not be discontinued
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