Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the ope
ID: 2512297 • Letter: V
Question
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 $60,000 variable and $16,600 fixed, and operating expenses are $30,700 variable and $18,900 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).)
Veronica is ______
The OtherFive Divisions Percy
Division Total Sales $1,665,000 $100,700 $1,765,700 Cost of goods sold 978,100 76,600 1,054,700 Gross profit 686,900 24,100 711,000 Operating expenses 528,100 49,600 577,700 Net income $158,800 $ (25,500 ) $133,300
Explanation / Answer
Solution:
Continue
Eliminate
Net Income
Increase (Decrease)
Sales
$100,700
$0
($100,700)
Variable expenses
Cost of goods sold
60,000
0
-60,000
Operating expenses
30,700
0
-30,700
Total variable
90,700
0
-90,700
Contribution margin
10,000
0
-10,000
Fixed expenses
Cost of goods sold
16,600
16,600
0
Operating expenses
18,900
18,900
0
Total fixed
35,500
35,500
0
Net income (loss)
($25,500)
($35,500)
($10,000)
Veronica is incorrect. The incremental analysis shows that net income will be 10,000 less if Percy Division is eliminated. This amount equals the contribution margin that would be lost through discontinuing the division.
Continue
Eliminate
Net Income
Increase (Decrease)
Sales
$100,700
$0
($100,700)
Variable expenses
Cost of goods sold
60,000
0
-60,000
Operating expenses
30,700
0
-30,700
Total variable
90,700
0
-90,700
Contribution margin
10,000
0
-10,000
Fixed expenses
Cost of goods sold
16,600
16,600
0
Operating expenses
18,900
18,900
0
Total fixed
35,500
35,500
0
Net income (loss)
($25,500)
($35,500)
($10,000)
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