(a) A recent accounting graduate from Marvel State University evaluated the oper
ID: 3066440 • Letter: #
Question
(a)
A recent accounting graduate from Marvel State University evaluated the operating performance of Fanning Company's four divisions. The following presentation was made to Fanning'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 $60,000. (See analysis below.)Other Three Divisions Southern Division Total Sales $ 2,000,000 $ 480,000 $ 2,480,000 Cost of Goods Sold 950,000 400,000 1,350,000 Gross Profit 1,050,000 80,000 1,130,000 Operating Expenses 800,000 140,000 940,000 Net Income $ 250,000 $ (60,000 ) $ 190,000
For the other divisions, cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the Southern Division is 30% fixed, and its operating expenses are 75% fixed. If the division is eliminated, only $15,000 of the fixed operating costs will be eliminated.
Explanation / Answer
continue eliminate net income increase/(Decrease) Sales $480,000 $0 ($480,000) variable cost COGS $280,000 $0 $280,000 op exp $35,000 $0 $35,000 Contribution margin $315,000 0 $315,000 fixed exp COGS $120,000 $120,000 $0 op exp $105,000 $90,000 $15,000 net income ($60,000) ($210,000) ($150,000) so accountant is not correct in saying to eliminate Southern Div.
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