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

Answer:

$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