A recent acc. graduate from Merciless University evaluated the operating perform
ID: 2601407 • Letter: A
Question
A recent acc. graduate from Merciless University evaluated the operating performance of Hardy Company's 3 divisions. The following presentation was made to its Board of Directors. During the presentation, the accountant gave the suggestion to eliminate Southern division as its total net income would increase by $20,000 as shown below
Other two divisions Southern Division Total
Sales 1,000,000 300,000 1,300,000
COGS 650,000 200,000 850,000
Gross Profit 350,000 100,000 450,000
Operating Expenses 100,000 120,000 220,000
Net Income 250,000 (20,000) 230,000
COGS is 80% variable and OE are 70% variable. If the division is eliminated, 40% of the FC will be eliminated.
a) Determine whether the company should really eliminate the southern division as acc. has suggested. Show how you arrived at your conclusion.
b) If the company had eliminated the southern division what net income would be reported.
Explanation / Answer
Solution:-
a) Determine whether the company should really eliminate the southern division as acc. has suggested. Show how you arrived at your conclusion:-
Company should not eliminate the soutern division. Calculation shown below:-
b) If the company had eliminated the southern division what net income would be reported:-
If company had eliminated the southern division then net income be 204,400.
Please Rate or comment if you have any doubt regarding this solution.
Statement of profit Other two divisions with Southern Division Other two divisions without Southern Division Sales 1,300,000 1,000,000 Variable COGS 680,000 520,000 Fixed COGS 170,000 154,000 Variable operating expenses 154,000 70,000 Fixed operating expenses 66,000 51,600 Net Income 230,000 204,400Related Questions
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