Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $2,000. The division sales for the year were $1,049,000 and the variable costs were $859,000. The fixed costs of the division were $192,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

a. 57600 decrease
b. 132400 decrease
c. 54700 decrease
d. 190000 decrease
e. 190000 increase

Answer 1

Answer:

The impact on operating income for eliminating this business segment would be a decrease in profit of $132,400. The right answer is b.

Explanation:

According to the data, we have the following details:

division sales=$1,049,000

variable costs= $859,000

Hence, contribution= division sales-variable costs

                                =$1,049,000-$859,000

                                =$190,000

30% of the fixed costs allocated to that division could be eliminated

Decrease in fixed cost=$192,000×30%= $57,600

Therefore, the impact on operating income for eliminating this business segment would be $190,000-$57,600= $132,400, which means that there would a decrease in profit.

Answer 2

Answer:

Net decrease in operating income   $132,400

Explanation:

The relevant cash flows to determine the impact of eliminating the division are:

1. lost contribution from shut down
2. Savings in fixed cost from shut down

Please, note that only 30% of the fixed costs to be saved is relevant, the balance is not relevant for this decision. Simply because they would be incurred either way.

                                                                             $

The impact on operating income:

Lost contribution = ( 1,049,000 - 859,000)= (190,000)

Savings in fixed cost = 30% ×192,000   =       57,600

Net decrease in operating income                132,400