Question

DJH Enterprises has 3 departments. Operating results for 2019 are as follows:

Department 1 Department 2 Department 3
Sales $670,000 $322,000 $856,000
Variable costs 445,000 287,000 602,000
Contribution margin $225,000 $35,000 $254,000
Direct fixed expenses $120,000 $27,000 $163,000
Common fixed expenses 75,000 30,000 94,000
Total fixed expenses $195,000 $57,000 $257,000
Operating income (loss) $30,000 ($22,000) ($3,000)

DJH is considering eliminating the departments that show losses. Assume that the direct fixed expenses could be avoided if the department is eliminated. What effect would elimination of Department 2 have on DJ H's total operating income?

Answer 1

DJH Enterprises

The effect of eliminating Department 2 will increase the total operating income to $27,000 from $5,000.

Step-by-step explanation:

a) Data and Calculations:

Operating Results for 2019 for the three departments:

Department 1 Department 2 Department 3 Total

('000)

Sales $670,000 $322,000 $856,000 $1,848

Variable costs 445,000 287,000 602,000 1,334

Contribution margin $225,000 $35,000 $254,000 $514

Direct fixed expenses $120,000 $27,000 $163,000 $310

Common fixed expenses 75,000 30,000 94,000 199

Total fixed expenses $195,000 $57,000 $257,000 509

Operating income (loss) $30,000 ($22,000) ($3,000) $5

Loss-making departments eliminated:

Department 1 Department 3 Total

Sales $670,000 $856,000 $1,526,000

Variable costs 445,000 602,000 1,047,000

Contribution margin $225,000 $254,000 $479,000

Direct fixed expenses $120,000 $163,000 $283,000

Common fixed expenses 75,000 94,000 169,000

Total fixed expenses $195,000 $257,000 $452,000

Operating income (loss $30,000 ($3,000) 27,000