23) Olso n Company has three departments. Data for the most recent year is prese

Question

23) Olso n Company has three departments. Data for the most recent year is presented below: Dept. C $4,000 3,280 $1,920 1,420 180 Dept. T $2,240 520 440 Sales Variable expenses Unavoidable fixed expenses Avoidable fixed expenses Operating income (loss) Ols mpany is considering eliminating Dept. C because it is operating at a loss. on Co Required A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace 8) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept. T without increasing fixed costs. Answer A) Operating income will decrease by $165. $4,000-(53,280+$555)- $165 B) Operating income will increase by $1,555. S2.240-($520 + $165)-S 1,555 Diff: 3 LO: 6-3 AACSB: Analytic skills Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions 6.4 Questions

Explanation / Answer

ANSWER:

Change in operating income if eliminates Dept. C and doubles the sales of Dept. T without increasing cost:

= -$165 + (Sales of dept. T - Variable Expense of Dept. T)

= -$165 + ($2240 - $520)

= $1555

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