Question

Gion Company is considering eliminating its windows division, which reported an operating loss for the recent year of $111,000. Division sales for the year were $1,170,000 and its variable costs were $1,035,000. The fixed costs of the division were $245,000. If the windows division is dropped, 60% of the fixed costs allocated to it could be eliminated. The impact on Gion’s operating income from eliminating this business segment would be:

Answer 1

$12,000 increase

Step-by-step explanation:

The computation of the impact on operating income from eliminating this business segment is shown below:

= Lost revenue + Variable cost avoided + Eliminated Fixed cost

= -$1,170,000 + $1,035,000 + $245,000 × 0.60

= -$1,170,000 + $1,035,000 + $147,000

= $12,000

The $12,000 represent the increase in operating income