Question

North division has the following information: if this division is eliminated, the fixed expenses can be allocated to the company's other divisions. What is the incremental effect on net income if the division is discontinued?

1) 60,000 increase
2) 620,000 decrease
3) 560,000 decrease
4) 580,000 increase

Answer 1

To determine the effect on net income when discontinuing a division, compare lost revenues to saved expenses. Without specific information on the North division's financials, we cannot conclude which option is correct. Generally, discontinuing a loss-making division would increase net income.

Step-by-step explanation:

To determine the incremental effect on net income if a division is discontinued, you must consider both the lost revenues and the saved expenses. If the fixed expenses can be reallocated to other divisions without increasing costs, then only the revenues and variable costs of the eliminated division affect the income change. For instance:

• If revenues are $10,000 and variable costs are $15,000, the division is operating at a loss, and discontinuing it would result in an increase in net income.
• If revenues are $20,000 and variable costs are $15,000, then the division is profitable, and discontinuing it would result in a decrease in net income.

Given that the context is lacking in this scenario, we cannot definitively determine the answer from the choices provided. Nevertheless, this explanation illustrates that if the division's costs exceed its revenues, discontinuing it would improve the company's net income, otherwise, it would reduce it.