Question

Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,100. The division sales for the year were $961,900 and the variable costs were $476,000. The fixed costs of the division were $528,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's operating income for eliminating this business segment would be:

Answer 1

$274,700

Step-by-step explanation:

The calculation of operating income is shown below:-

Total losses after the division is discontinued = Fixed cost × Remaining percentage

= $528,000 × 60%

= $316,800

So, the impact on net operating income would be decrease = Total losses after the division is discontinued - Operating loss for the recent year

= $316,800 - $42,100

= $274,700

Therefore for computing the impact on Granfield's operating income we simply applied the above formula.