A recent accounting graduate evaluated the operating performance of Fane Company's three divisions. The following presentation was made to Fane's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division, stating that total net income would increase by $20,000 as shown in the analysis below.
other 2 division Southern Divis Total
Sales 1 million 300000 1.3
Cost of goods sole 650000 200000 850000
Gross profit 350000 100000 450000
Operating exp. 100000 120000 220000
Net Income 250000 (20000) 230000
Cost of goods sold is 75% variable and operating expenses are 70% variable. If the division is eliminated, 40% of the fixed costs will be eliminated.