Question

Valdez Company is considering eliminating its kitchen division, which reported an operating loss of $61,000 for the past year as shown below. Segment Income (Loss) Sales $ 1,200,000 Variable costs 894,000 Contribution margin 306,000 Fixed costs 367,000 Income (loss) $ (61,000) If the kitchen division is dropped, all $894,000 of its variable costs are avoidable, and $220,200 of its fixed costs are avoidable. The impact on Valdez’s income from eliminating this business segment would be:

Answer 1

The impact on Valdez Company's income from eliminating the kitchen division would be an improvement of $1,053,200, as the savings from avoiding the variable and fixed costs associated with the division exceed its current operating loss.

Step-by-step explanation:

The student is asking for an analysis of the financial implications of discontinuing the kitchen division of Valdez Company. We're told that eliminate the division would avoid all the $894,000 of variable costs and $220,200 of fixed costs. To calculate the impact on income, we use the formula:

• Current loss = $(61,000)
• Avoidable fixed costs = $220,200
• Avoidable variable costs = $894,000
• Net impact on income = Avoidable fixed costs + Avoidable variable costs + Current loss.

Plugging in the values, we get:

Net impact on income = $220,200 + $894,000 - $61,000

Net impact on income = $1,053,200

If the kitchen division is eliminated, Valdez Company's income will improve by $1,053,200 because the avoidable losses and costs exceed the current loss.