Lynn Devers, a recent graduate of Smith’s accounting program, evaluated the operating performance of Knutson Company’s six divisions. Lynn made the following presentation to Knutson’s Board of Directors and suggested the Adams Division be eliminated. “If the Adams Division is eliminated,” she said “Our net income would increase by $23,200.”
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Adams |
Total |
|
|
Five Divisions |
Division |
||
|
Sales |
$ 2,422.600 |
$ 249,400 |
$ 2,672,000 |
|
Cost of goods sold |
1,712.500 |
199,300 |
1.911 :800 |
|
Gross profit |
710,100 |
50:100 |
760200 |
|
Operating expenses |
456;000 |
73,300 |
529,300 |
|
Net income |
$ 254.100 |
$ (23,200) |
$ 230.900 |
The cost of goods sold for Adams Division is 30% fixed, and its operating expenses are 60% fixed. None of Adams Division’s fixed Cost will be eliminated if the division is discontinued.
Instructions
Is Lynn right about eliminating the. Adams Division? Prepare a schedule to support your answer.
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