Question

The management of Kelso is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, the direct fixed costs associated with this division could be avoided. Given these data, the impact on net income of dropping the Eastern division would be: a. $140,000 Decrease b. $70,000 Increase c. $240,000 Decrease d. $30,000 Increase

Answer 1

I could not find the exact details required to solve this so I will use a similar question that you can reference;

The impact of dropping the Eastern division is;

= Consolidated operating income + Direct Fixed costs avoided - Contribution margin lost

= (-75,000 + 15,000) + 180,000 - ( 550,000 - 275,000)

= -60,000 + 180,000 - 275,000

= -$155,000

Loss of $155,000