Exercise 7-15 Veronica Mars, a recent graduate of Bell\'s accounting program, ev

Question

Exercise 7-15 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 $25,500. In the Percy Division, cost of goods sold is $59,000 variable and $17,000 fixed, and operating expenses are $29,000 variable and $20,500 fixed. None of the Percy Division?s fixed costs will be eliminated if the division is discontinued. Is Veronica right about eliminating the Percy Division? Prepare a schedule to support your answer. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Explanation / Answer

Percy Division                                                                Current         

Sales                                                                           $100,000        

less :-variable cost of goods sold          $ 59,000

         variable operating expenses         $29,000                    

                                                             -------------       $ 88,000

Contribution Margin                                                    $ 12,000

On elimination of percy division, the fixed cost of percy division would be continued to be incurred by other five divisions and also the contribution of percy division $12,000 would be lost.

Veronica, is, therefore wrong in eliminating percy division. Percy division should be continued.

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