The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.Projections for the next year are as follows: If the Blur Division were dropped,Blink Division's sales would increase by 30%.If this happened,the operating income for Gadwell Corporation as a whole would be:
A)$72,800.
B)$56,000.
C)$79,100.
D)$59,150.

Question

The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.Projections for the next year are as follows:  If the Blur Division were dropped,Blink Division's sales would increase by 30%.If this happened,the operating income for Gadwell Corporation as a whole would be:
A)$72,800. 
B)$56,000. 
C)$79,100. 
D)$59,150.

Quizplus · Accepted Answer

First, we need to calculate the current operating income for Gadwell Corporation as a whole, which is:

Operating Income = (Blink Division Sales * Blink Division Contribution Margin) + (Blur Division Sales * Blur Division Contribution Margin)

Operating Income = ($300,000 * 0.20) + ($200,000 * 0.10) = $60,000

Next, we need to calculate the new operating income if the Blur Division is dropped and Blink Division's sales increase by 30%. This means that the new Blink Division sales would be:

New Blink Division Sales = $300,000 * 1.30 = $390,000

The contribution margin for Blink Division would remain the same at 0.20. Therefore, the new operating income for Gadwell Corporation would be:

New Operating Income = (New Blink Division Sales * Blink Division Contribution Margin)

New Operating Income = ($390,000 * 0.20) = $78,000

This is an increase of $18,000 from the current operating income of $60,000.

Therefore, the best choice is C) $79,100, which is the closest answer to the new operating income of $78,000.

The Operations of Gadwell Corporation Are Divided into the Blink