Question

Carns Company is considering eliminating its small tools division, which reported an operating loss for the recent year of $85,000. Division sales for the year were $1,310,000 and its variable costs were $1,175,000. The fixed costs of the division were $220,000. If the kitchen division is dropped, 45% of the fixed costs allocated it could be eliminated. The impact on Carns’s operating income from eliminating the small tools division would be:

Answer 1

Eliminating the small tools division would lead to a reduction in Carns Company's operating income by $36,000.

Step-by-step explanation:

The question is about the financial impact on Carns Company's operating income if it decides to eliminate its small tools division. To calculate the impact, we consider the operating loss of the division, along with its sales, variable costs, and fixed costs.

When a division is eliminated, only a portion of the fixed costs may be saved, in this case, 45%. If we assume the fixed costs that can be eliminated amount to $99,000 (45% of $220,000), the savings from cutting the division would be offset by the loss of contribution margin (sales minus variable costs).

The division's contribution margin is $135,000 ($1,310,000 in sales minus $1,175,000 in variable costs). Therefore, eliminating the small tools division would actually reduce Carns Company's operating income by the difference between the contribution margin and the eliminated fixed costs, which is $135,000 - $99,000 = $36,000.

Answer 2

$36,000

Explanation:

As per the data given in the question,

Current Loss = $85,000

If we don't consider division, then 45% of fixed cost cab be eliminated and remaining 55% of fixed cost is considered.

Fixed cost to be applied

= $220,000 × 55%

= $121,000

Enhancing in operating loss when division is eliminated

= $121,000 - $85,000

= $36,000