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

If the West Division were eliminated, the company would save traceable fixed costs of $835,000 (West Division fixed costs of $765,000 + $70,000 in allocated fixed costs). However, the company would also lose $680,000 in revenues, which would result in a net loss of $155,000 ($525,000 - $835,000). Therefore, the elimination of the West Division would result in an overall company net operating loss of $155,000. 11ea7998_5c57_8286_911b_67d5799155f4_TB2627_00_TB2627_00 The company currently has a net operating loss of $60,000-the combined effect of the apparent $75,000 loss in the West Division and the apparent $15,000 profit in the East Division.Dropping the West Division would reduce net operating income by $95,000.Therefore, after dropping the West Division, the overall company net operating loss would be $155,000 (= ?$60,000 - $95,000).

The Cook Corporation Has Two Divisions--East and West