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Costs of Eliminating a Division and Buying Wheels

For the following problems, please see attached for full formatting of tables, etc.

1. The Cook Company has two divisions--Eastern and Western. The divisions have the following revenues and expenses:

- Sales
- Variable costs
- Direct fixed costs
- Allocated corporate costs

Net income (loss) Eastern
$550,000
275,000
180,000
170,000
( 75,000) Western
$500,000
200,000
150,000
145,000
5,000

The management of Cook is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, the direct fixed costs associated with this division could be avoided. However, corporate costs would still be $315,000 in total. Given these data, the elimination of the Eastern Division would result in an overall company net income (loss) of:

$(165,000).
($155,000).
($75,000).
$15,000

2. The Talbot Company makes wheels that it uses in the production of bicycles. Talbot's costs to produce 100,000 wheels annually are:
Direct materials............................... $30,000
Direct labor..................................... $50,000
Variable overhead........................... $20,000
Fixed overhead............................... $70,000

An outside supplier has offered to sell Talbot similar wheels for $1.25 per wheel. If the wheels are purchased from the outside supplier, $15,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for $45,000 per year.

If Talbot chooses to buy the wheel from the outside supplier, then the change in annual net operating income due to accepting the offer is a:

$35,000 increase
$10,000 decrease
$45,000 increase
$70,000 increase

Attachments

Solution Summary

Solution looks at two financial problems, one about the net losses or gains of eliminating a division of the company, and another about getting wheels for production from outside suppliers. Attached in Word.

$2.19