Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,300. The division sales for the year were $1,053,000 and the variable costs were $863,000. The fixed costs of the division were $196,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

(A) $190,000 decrease

(B) $190,000 increase

(C) $58,800 decrease

(D) $55,500 decrease

(E) $131,200 decrease

Answer 1

I believe it’s b add all the numbers when you finish adding reduced by 30 percent

Answer 2

$133,900 decrease

Step-by-step explanation:

Since the mountain bike division's total fixed costs are $196,000, and only 30% can be eliminated, then the rest of the company will absorb $137,200 in fixed costs.

Since the division has an operating loss of $3,300, then that would be saved.

Total impact on income = - $137,200 + $3,300 = -$133,900

*I believe one amount is wrong, the operating loss was $6,000, not $3,300 (= $1,053,000 - $863,000 - $196,000 = -$6,000). If we calculate the impact with an operating loss of $6,000, then the net effect would be a $131,200 decrease (option E)