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Accounting: Keep or eliminate decision.

Managerial Accounting, 3rd Edition, by Weygandt, Kieso, and Kimmel
Solving Managerial Accounting Problems Using Microsoft Excel for Windows

Exercise E6-10

Maggie Sharrer, a recent graduate of Rolling's accounting program, evaluated the operating performance of Poway Company's six divisions. Maggie made the following presentation to Poway's Board of Directors and suggested the Erie Division be eliminated. "If the Erie Division is eliminated", she said, "our total profits would increase by $24,500".

"The Other
Five Divisions" "Erie
Division" Total

Sales $1,664,200 $100,000 $1,764,200
Cost of Goods Sold $978,520 $76,500 $1,055,020
Gross Profit $685,680 $23,500 $709,180
Operating Expenses $527,940 $48,000 $575,940
Net Income $157,740 ($24,500) $133,240

In the Erie Division, cost of goods sold is $60,000 variable and $16,500 fixed, and operating expenses are
$25,000 variable and $23,000 fixed. None of the Erie Division's fixed costs will be eliminated if the division is discontinued.

Is Maggie right about eliminating the Erie Division? Prepare a schedule to support your answer.


Solution Summary

The problem deals with either keeping or eliminating a division among others.