Swanson Company has 3 divisions: X,Y,and Z.Division X's income statement shows the following for the year ended December 31: Cost of goods sold is 75 percent variable and 25 percent fixed.Of the fixed costs,60 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division X were eliminated.Of the administrative expenses,90 percent are applied from corporate costs.If Division X were eliminated,Swanson's income would
A)increase by $150,000.
B)decrease by $ 75,000.
C)decrease by $155,000.
D)decrease by $215,000.

Question

Swanson Company has 3 divisions: X,Y,and Z.Division X's income statement shows the following for the year ended December 31:  Cost of goods sold is 75 percent variable and 25 percent fixed.Of the fixed costs,60 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division X were eliminated.Of the administrative expenses,90 percent are applied from corporate costs.If Division X were eliminated,Swanson's income would
A)increase by $150,000. 
B)decrease by $ 75,000. 
C)decrease by $155,000. 
D)decrease by $215,000.

Quizplus · Accepted Answer

To determine the impact if Division X were eliminated, we need to analyze its costs and their behavior:

- Cost of goods sold (COGS): 75% variable and 25% fixed. This means that COGS will decrease by 75% if sales decrease by the same percentage (assuming constant selling price and product mix). The remaining 25% of COGS (the fixed portion) will not change if the division is closed.
- Selling expenses: All relate to the division and would be eliminated if Division X were eliminated. This means that they are avoidable costs and will not affect Swanson's income if the division is closed.
- Administrative expenses: 90% are applied from corporate costs. This means that only 10% of the administrative expenses are directly traceable to Division X. As such, if Division X were eliminated, Swanson would still need to incur 90% x $150,000 = $135,000 of administrative expenses to support the remaining divisions.
- Avoidable fixed costs: 60% of the fixed costs can be avoided if the division is closed. This means that Swanson can save 60% x 25% x $800,000 = $120,000 if it closes Division X.

Putting these figures together, we can calculate the net impact of closing Division X on Swanson's income:

Net income impact = (Decrease in COGS) + (Decrease in avoidable fixed costs) - (Remaining administrative expenses)
Net income impact = (75% x $1,200,000) + (60% x 25% x $800,000) - ($135,000)
Net income impact = $900,000 + $120,000 - $135,000 = $885,000

Therefore, if Division X were eliminated, Swanson's income would decrease by $155,000 (Option C).

Swanson Company Has 3 Divisions: X,Y,and Z