Question

The Cook Corporation has two divisions--East and West. The divisions have the following revenues and expenses: East West Sales $ 601,000 $ 504,000 Variable costs 229,000 298,000 Traceable fixed costs 149,500 190,000 Allocated common corporate costs 126,600 154,000 Net operating income (loss) $ 95,900 $ (138,000 ) The management of Cook is considering the elimination of the West Division. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income (loss) of:

Answer 1

Answer:

By eliminating division West net operating loss results in $58,100

Explanation:

By eliminating division West, the allocated common corporate costs would only be allocated 100% to East division as shown below:

                                             Division East

Sales                                                                                     $601,000

variable costs                                                                       ($229,000)

Contribution                                                                           $372,000

traceable fixed costs                                                             ($149,500)

allocated common corporate costs($126,600+$154,000) ($280.600)    

Net operating income/(loss)                                                 ($58,100)

By eliminating division West,overall net operating loss increase from -$42,100 ($95,900-$138,000)  to -$58,100,hence actual increase in losses of $16,000