The Cook Corporation has two divisions-East and West. The divisions have the following revenues and expenses: 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:
A) $15,000
B) ($155,000)
C) ($75,000)
D) ($60,000)

Question

The Cook Corporation has two divisions-East and West. The divisions have the following revenues and expenses:  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:
A) $15,000 
B) ($155,000) 
C) ($75,000) 
D) ($60,000)

Quizplus · Accepted Answer

To determine the impact of eliminating the West Division, we need to calculate the current net operating income of the company and compare it to the net operating income if the West Division were eliminated.

Current net operating income:

East Division:
Revenue: $500,000
Variable expenses: $350,000
Traceable fixed expenses: $100,000
Divisional operating income: $50,000

West Division:
Revenue: $400,000
Variable expenses: $200,000
Traceable fixed expenses: $150,000
Divisional operating income: $50,000

Corporate expenses: $100,000

Total net operating income: $0 ($100,000 - $100,000)

If the West Division were eliminated, the traceable fixed expenses of $150,000 would be avoided, but the corporate expenses would remain the same:

East Division:
Revenue: $900,000 ($500,000 + $400,000)
Variable expenses: $550,000 ($350,000 + $200,000)
Traceable fixed expenses: $100,000
Divisional operating income: $250,000 ($900,000 - $550,000 - $100,000)

Corporate expenses: $100,000

Total net operating income: $150,000 ($250,000 - $100,000)

Therefore, the elimination of the West Division would result in an overall company net operating loss of $155,000 ($0 - $150,000).

The Cook Corporation Has Two Divisions-East and West