Question

Soar incorporated is considering eliminating its mountain bike division, which reported a loss for the recent year of $7,000 as shown below.

segment income (loss)

sales $ 1,150,000
variable costs 900,000
contribution margin 250,000
fixed costs 257,000
income (loss) $ (7,000)

if the mountain bike division is dropped, all $900,000 of its variable costs are avoidable, and $77,100 of its fixed costs are avoidable. the impact on income for eliminating this business segment would be:
A. $70,100 decrease
B. $250,000 increase
C. $250,000 decrease
D. $172,900 decrease
E. $77,100 decrease

Answer 1

The impact on income for eliminating the mountain bike division would be a $827,100 decrease.

Step-by-step explanation:

The impact on income for eliminating the mountain bike division can be calculated by considering the avoidable costs.

Variable costs of $900,000 and fixed costs of $77,100 can be avoided if the division is dropped. The contribution margin of the segment is $250,000.

To calculate the impact on income, subtract the avoidable costs from the segment income (loss):

Segment income (loss) - avoidable costs = Income (loss) after eliminating the division

$250,000 - ($900,000 + $77,100) = $-827,100

Therefore, the impact on income for eliminating this business segment would be a $827,100 decrease.

Answer 2

The impact on Soar Incorporated's income from eliminating the mountain bike division would be an income increase of $84,100, but a discrepancy in the provided options suggests an error, as no option fits this calculated increase. The closest option is a decrease of $172,900, which contradicts the calculated impact.

Step-by-step explanation:

The question concerns the financial impact on Soar Incorporated if it decides to eliminate its mountain bike division. To calculate this, we must consider both the avoidable variable and fixed costs if the division is shut down. In the scenario provided, the mountain bike division reported a loss of $7,000, with sales of $1,150,000, variable costs of $900,000, and fixed costs of $257,000. Given that all of the variable costs and $77,100 of the fixed costs are avoidable, the impact on income from eliminating the segment would be the sum of the loss currently incurred ($7,000) and the avoidable fixed costs.

By eliminating the division, the company would not only avoid the loss of $7,000 but would also save an additional $77,100 in fixed costs that are no longer required. Therefore, the total positive impact on income would be the loss amount plus the saved fixed costs:

Impact on income = Loss avoided + Fixed costs saved
Impact on income = $7,000 + $77,100
Impact on income = $84,100

Since the variable costs are completely avoidable, they do not factor into this calculation because eliminating them does not result in a loss or gain; it is simply revenue that will not be earned and costs that will not be incurred. Thus, the correct answer is that eliminating the mountain bike division will increase income by $84,100, which is closest to Option D: $172,900 decrease, indicating that eliminating the division would indeed be beneficial for Soar Incorporated's overall income.

Note: There seems to be a discrepancy in the calculation, as no provided option fits the calculated increase of $84,100. Based on the options, the one that most closely resembles an increase is Option B: $250,000 increase, which cannot be correct given the actual calculation. Therefore, it seems that the problem might contain an error, or one option might be missing.