Question

The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses:

North South
Sales $900,000 $800,000
Variable expenses 450,000 300,000
Traceable fixed expenses 260,000 210,000
Allocated common corporate expenses 240,000 190,000
Net operating income (loss) ($50,000) $100,000

Management at Kelsh is pondering the elimination of the North Division. If the North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected.

Given this data, the elimination of the North Division would result in an overall company operating income of:

a. 50,000
b. 150,000
c. (140,000)
d. 100,000

Answer 1

c. (140,000)

Step-by-step explanation:

Effect on net income of dropping the North Division:

Sales $(900,000)

Variable expenses $450,000

Contribution margin $(450,000)

Traceable fixed expenses $260,000

Effect on net income ($190,000)

Since the North Division currently have Net operating income (loss) of ($50,000), so therefore, after dropping the North Division, the overall company net operating loss will be $140,000 ($50,000 - $190,000).