Perry Company has three divisions: R,S, and T. Division R\'s income statement sh

Question

Perry Company has three divisions: R,S, and T. Division R's income statement shows the following for the year ended December 31: Sales $1,000,000; Cost of Goods Sold $(800,000); Gross Profit $$200,000; Selling expenses $100,000; Administrative Expenses $250,000; Net Loss $(150,000) Cost of Goods sold is at 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the selling expenses related to the division would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from corporate costs. If Division R were eliminated, Perry's income would: a) increase by $150,000; b) decrease by $75,000; c) decrease by $155,000; d) decrease by $215,000

Explanation / Answer

Sales foregone

$(1,000,000)

COGS avoided

     Variable

$600,000

      Fixed

120,000

720,000

Selling Expense Avoided

100,000

Administrative Expense Avoided

25,000

Decrease in income

$( 155,000)

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Perry Company has three divisions: R,S, and T. Division R's income statement shows the following for the year ended December 31: Sales $1,000,000; Cost of Goods Sold $(800,000); Gross Profit $$200,000; Selling expenses $100,000; Administrative Expenses $250,000; Net Loss $(150,000) Cost of Goods sold is at 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are avoidable if the division is closed. All of the selling expenses related to the division would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from corporate costs. If Division R were eliminated, Perry's income would:

a) increase by $150,000;

b) decrease by $75,000;

c) decrease by $155,000;-correct answer

d) decrease by $215,000

Sales foregone

$(1,000,000)

COGS avoided

     Variable

$600,000

      Fixed

120,000

720,000

Selling Expense Avoided

100,000

Administrative Expense Avoided

25,000

Decrease in income

$( 155,000)

=========

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