Calvert Company has 3 divisions: A,B,and C Division A's income statement shows the following for the year ended December 31: Cost of goods sold is 80 percent variable and 20 percent fixed.Of the fixed costs,50 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division A were eliminated.Of the administrative expenses,85 percent are applied from corporate costs.If Division A were eliminated,Calvert's income would
A)increase by $100,000.
B)decrease by $197,500.
C)decrease by $310,000.
D)decrease by $422,500.

Question

Calvert Company has 3 divisions: A,B,and C Division A's income statement shows the following for the year ended December 31:  Cost of goods sold is 80 percent variable and 20 percent fixed.Of the fixed costs,50 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division A were eliminated.Of the administrative expenses,85 percent are applied from corporate costs.If Division A were eliminated,Calvert's income would
A)increase by $100,000. 
B)decrease by $197,500. 
C)decrease by $310,000. 
D)decrease by $422,500.

Quizplus · Accepted Answer

If Division A is eliminated, the variable portion of cost of goods sold will be eliminated, resulting in a decrease of $400,000 (80% of $500,000) in total costs. Of the fixed costs, only 50% are avoidable, so $100,000 (50% of $200,000) will be eliminated. All of the selling expenses of $150,000 relate to Division A and will be eliminated. Of the $300,000 of administrative expenses, 85% or $255,000 will remain as corporate expenses. Therefore, the total decrease in expenses is $650,000 ($400,000 + $100,000 + $150,000). The division's operating loss is $125,000, so if it is eliminated, the company's income will decrease by $525,000 ($125,000 - $650,000).

Calvert Company Has 3 Divisions: A,B,and C Division A's Income