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 $26,600." The Other Five Divisions Division Percy Total Sales Cost of goods sold Gross profit Operating expenses Net income $1,663,000 $100,400 $1,763,400 978,800 76,900 1,055,700 707,700 576,300 $158,000 $ (26,600) $131,400 684,200 23,500 526,200 50,100 In the Percy Division, cost of goods sold is $59,300 variable and $17,600 fixed, and operating expenses are $29,200 variable and $20,900 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). Net Income Increase (Decrease) Continue Eliminate Sales Variable costs Cost of goods sold Operating expenses

Explanation / Answer

SOLUTION

Veronica is incorrect. The incremental analysis shows that net income will be $11,900 less if the Percy division is eliminated.

Continue ($) Eliminate ($) Net income increase/ (decrease) ($) Sales (A) 100,400 0 (100,400) Variable expenses: Cost of goods sold 59,300 0 (59,300) Operating Expenses 29,200 0 (29,200) Total Variable (B) 88,500 0 (88,500) Contribution Margin (C=A-B) 11,900 0 (11,900) Fixed Expenses: Cost of goods sold 17,600 17,600 0 Operating Expenses 20,900 20,900 0 Total fixed Expenses (D) 38,500 38,500 0 Net Income / (Loss) (C-D) (26,600) (38,500) (11,900)

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