Exercise 8-18 (Part Level Submission) Wildhorse, Inc. operates three divisions,

Question

Exercise 8-18 (Part Level Submission) Wildhorse, Inc. operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants to close it. "Survival of the fittest, I say!" was his response when the Weak division's manager insisted that his division earned money for the company. Following is the most recent financial analysis for each division: Weak Average Strong $126,900 $342,800 $527,600 Sales revenue Variable expenses 57,000 196,900 300,500 Contribution margin 69,900 145,900 227,100 Direct expenses Allocated expenses 53,600 53,600 53,600 Operating income (14,300) $14,500 $60,300 30,600 77,800 113,200

Explanation / Answer

The income will decrease by $39,300

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Allocated expenses are divided equally among the three divisions.

Total allocated expenses = 53,600+53,600+53,600 = 160,800

Average divisions share of allocated expenses after the weak division is closed = 160,800 / 2 = 80,400

If weak is dropped, then $80,400 will be allocated to Average, resulting in a $12,300 loss for the division as currently reported.

Weak Division Contribution margin lost (69,900) Direct expenses 30,600 Net loss from dropping the division (39,300)

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