Question

Crane Company's Division B recorded sales of $74,500, variable cost of goods sold of $51,600, variable selling expenses of $20,000, and fixed costs of $12,900, creating a loss from operations of $10,000. Determine the differential income or loss from the sales of Division B. Enter a loss as a negative number. Should this Division B be discontinued? (If the answer to above part is zero, select "No".)

Answer 1

The differential income from Division B's sales is $2,900, which means Division B should not be discontinued as it contributes positively, excluding fixed costs, to the company's earnings.

Step-by-step explanation:

To determine the differential income or loss from the sales of Division B, we must consider only the costs and revenues that would change if the division were discontinued. Fixed costs are typically not eliminated when a division is discontinued, so we exclude them from our calculation. In this case, Division B's variable costs (the sum of variable cost of goods sold and variable selling expenses) amount to $51,600 + $20,000 = $71,600.

By comparing this to the division's sales, we can calculate the differential income or loss:

1. Sales: $74,500
2. Variable Costs: $71,600
3. Differential Loss: Sales - Variable Costs = $74,500 - $71,600 = $2,900

As the result is a positive number, this represents a differential income of $2,900 for Division B. Since discontinuing the division would result in losing this amount from the overall company's earnings, Division B should not be discontinued. It contributes positively to the company's earnings before considering fixed costs.