Soar Incorporated is considering eliminating its mountain bike division,which reported an operating loss for the recent year of $3,000.The division sales for the year were $1,050,000 and the variable costs were $860,000.The fixed costs of the division were $193,000.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)$57,900 decrease
B)$132,100 decrease
C)$54,900 decrease
D)$190,000 increase
E)$190,000 decrease

Question

Quizplus · Accepted Answer

First, we need to calculate the contribution margin for the mountain bike division:
Revenue - Variable Costs = Contribution Margin
$1,050,000 - $860,000 = $190,000

Next, we need to calculate the operating loss after deducting the fixed costs:
Contribution Margin - Fixed Costs = Operating Loss
$190,000 - $193,000 = -$3,000

Since the division reported an operating loss of $3,000, it would be better for the company to eliminate this division. If the division is dropped, 30% of the fixed costs allocated to that division could be eliminated:
$193,000 x 0.3 = $57,900

Therefore, the impact on operating income for eliminating this business segment would be the elimination of the operating loss of $3,000 and the reduction of fixed costs by $57,900 (30%):
$3,000 + $57,900 = $60,900 decrease

However, the question is asking for the impact on operating income, not net income. Therefore, we need to add back the allocated fixed costs of $193,000 that would no longer be allocated to the mountain bike division:
$60,900 + $193,000 = $253,900 decrease

In other words, eliminating the mountain bike division would result in a decrease in operating income of $253,900. Therefore, the correct answer is B) $132,100 decrease.

Soar Incorporated Is Considering Eliminating Its Mountain Bike Division,which Reported