Valdez Company is considering eliminating its kitchen division,which reported an operating loss of $53,000 for the past year.Kitchen division sales for the year were $1,040,000,and its variable costs were $775,000.The fixed costs of the division were $318,000.If the kitchen division is dropped,60% of the fixed costs allocated to it could be eliminated.The impact on Valdez's operating income from eliminating this business segment would be:
A)$74,200 decrease
B)$265,000 increase
C)$274,200 decrease
D)$74,200 increase
E)$265,000 decrease

Question

Quizplus · Accepted Answer

If the kitchen division is eliminated, Valdez Company would save 60% of the fixed costs, which is $190,800 (60% of $318,000). The division's operating loss is $53,000. Eliminating the division would result in a net decrease in operating income of $74,200 ($53,000 loss - $190,800 savings).

Valdez Company Is Considering Eliminating Its Kitchen Division,which Reported an Operating