E7-15 Use incremental analysis concerning elimination of division. Veronica Mars
ID: 2569515 • Letter: E
Question
E7-15 Use incremental analysis concerning elimination of division. 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 $26,000." The Other Percy Five Divisions Division Total Sales $1,664,200 $100,000 $1,764,200 Cost of goods sold 978,520 76,000 1,054,520 Gross Profit 685,680 24,000 709,680 Operating expenses 527,940 50,000 577,940 Net income $157,740 ($26,000) $131,740 In the Percy Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses are $30,000 variable and $20,000 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Instructions Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" . After you have completed E7-15, consider the following additional question. 1. Assume that variable cost of goods sold for the Percy Division changed to $68,000 and fixed operating expenses changed to $27,500. There was no change to variable operating costs. How would these changes impact your answer? E7-15 Use incremental analysis concerning elimination of division. 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 $26,000." The Other Percy Five Divisions Division Total Sales $1,664,200 $100,000 $1,764,200 Cost of goods sold 978,520 76,000 1,054,520 Gross Profit 685,680 24,000 709,680 Operating expenses 527,940 50,000 577,940 Net income $157,740 ($26,000) $131,740 In the Percy Division, cost of goods sold is $61,000 variable and $15,000 fixed, and operating expenses are $30,000 variable and $20,000 fixed. None of the Percy Division's fixed costs will be eliminated if the division is discontinued. Instructions Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer. NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .Explanation / Answer
In deciding elimination of a division the factor to consider is whether there is a positive contribution or not.
Since percy division is giving 9000 contribution, elimination of the division will result in decrease in net operating income on 9000 to the entity.
1. After changes:
Even after changes, percy division is contribution 2000 to net income of the entity. Hence decision willnot change
Particulars Amount Sales 100000 Less: Variable cost of goods sold -61000 Variable operating expenses -30000 Total variable costs -91000 Contribution 9000Related Questions
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