A recent accounting graduate evaluated the operating performance of Fane Company

Question

A recent accounting graduate evaluated the operating performance of Fane Company's three divisions. The following presentation was made to Fane'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 $20,000 as shown in the analysis below.
Other Two Divisions Southern Division Total
Sales $1,000,000 $300,000 $1,300,000
cost of Goods Sold 650,000 200,000 850,000
Gross Profit 350,000 100,000 450,000
Operating Expenses 100,000 120,000 220,000
Net Income $250,000 $(20,000) $230,000

Cost of goods sold is 75% variable and operating expenses are 70% variable. If the division is eliminated, 40% of the fixed costs will be eliminated.

Do you concur with the new accountant's recommendation? Pressent a schedule to support your answer.

Explanation / Answer

Sales of Southern Division 300,000.00 Less: Variable COGS (150,000.00) Variable Operating Expenses (84,000.00) Contribution 66,000.00 Sales of remaining two divisions: 1,000,000.00 Less: Variable COGS (487,500.00) Variable Operating Expenses (70,000.00) Contribution 442,500.00 The fixed costs are irrelevant for decision making . The Southern Division is contributing positively. Hence it need not be closed. Sales of Southern Division 300,000.00 Less: Variable COGS (150,000.00) Variable Operating Expenses (84,000.00) Contribution 66,000.00 Sales of remaining two divisions: 1,000,000.00 Less: Variable COGS (487,500.00) Variable Operating Expenses (70,000.00) Contribution 442,500.00

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.