Company has three departments. Data for the most recent year is presented below:

Question

Company has three departments. Data for the most recent year is presented below:

Dept. C Dept. A Dept. T

Sales $4,000 $ 1,920 $2,240

Variable expenses 3,280 1,420 520

Unavoidable fixed expenses 480 180 440

Avoidable fixed expenses 555 265 360

Operating income (loss) $(315) $55 $920

Olson Company is considering eliminating Dept. C because it is operating at a loss.

Required:

A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace it.

B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of

Dept. T without increasing fixed costs.

Explanation / Answer

A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace it. Dept.c Dept. A Dept. T Total Sales 1920 2240 Variable expenses 1420 520 Unavoidable fixed expenses 480 180 440 Avoidable fixed expenses 265 360 Operating income (loss) -480 55 920 495 The change in operating income if Olson Company eliminates Dept. C and does not replace it: Present Operating Income of Olson Company $        660 After Eliminating Dept C Operating Income of Olson Company $        495 Decrease in Operating Income of Olson Company by eliminating Dept C $        165 B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept. T without increasing fixed costs. Dept.c Dept. A Dept. T Total Sales 1920 4480 Variable expenses 1420 1040 Unavoidable fixed expenses 480 180 440 Avoidable fixed expenses 265 360 Operating income (loss) -480 55 2,640 2,215 The change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept T Present Operating Income of Olson Company 660 After Eliminating Dept C Operating Income of Olson Company 2215 Increase in Operating Income of Olson Company by eliminating Dept C 1555

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