Veronica Mars, a recent graduate of Bell’s accounting program, evaluated the ope

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 $26,500.”

In the Percy Division, cost of goods sold is $60,500 variable and $16,300 fixed, and operating expenses are $29,100 variable and $20,600 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 _______. (correct/incorrect)

The Other
Five Divisions Percy
Division Total Sales $1,663,000 $100,000 $1,763,000 Cost of goods sold 978,100 76,800 1,054,900 Gross profit 684,900 23,200 708,100 Operating expenses 529,000 49,700 578,700 Net income $155,900 $ (26,500 ) $129,400

Explanation / Answer

Veronica is incorrect.

As shown beow, Percy Division is contributing $10,400 towards fixed expenses after meeting all its variable expenses and since the fixed costs cannot be avoided, if Percy Division is discontinued, the other divisions have to contribute this $10,400 which will result in reduced net income.

Therefore it is advised to continue Percy division.

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