Problem: Maggie Sharrer, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions. Maggie made the following presentation to Poway's Board of Directors and suggested the Erie Division be eliminated. "If the Erie Division is eliminated", she said, "our total profits would increase by $24,500".
|
The Other
Five Divisions |
Erie
Division |
Total |
| Sales |
$1,664,200 |
$100,000 |
$1,764,200 |
| Cost of Goods Sold |
$978,520 |
$76,500 |
$1,055,020 |
| Gross Profit |
$685,680 |
$23,500 |
$709,180 |
| Operating Expenses |
$527,940 |
$48,000 |
$575,940 |
| Net Income |
$157,740 |
($24,500) |
$133,240 |
In the Erie Division, cost of goods sold is $60,000 variable and $16,500 fixed, and operating expenses are $25,000 variable and $23,000 fixed. None of the Erie Division's fixed costs will be eliminated if the division is discontinued.
Instructions:
Is Maggie right about eliminating the Erie Division? Prepare a schedule to support your answer.
|
Continue |
Eliminate |
Net Income
Inc (Dec) |
| Sales |
Amount |
Amount |
Amount |
| Title |
|
|
|
| Title |
Amount |
Amount |
Amount |
| Title |
Amount |
Amount |
Amount |
| Total variable |
Formula |
Formula |
Formula |
| Title |
Formula |
Formula |
Formula |
| Fixed costs |
|
|
|
| Title |
Amount |
Amount |
Amount |
| Title |
Amount |
Amount |
Amount |
| Title |
Formula |
Formula |
Formula |
| Net income (loss) |
Formula |
Formula |
Formula |