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Eliminating a division

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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 Eric Division be eliminated.

The Other Eric Total
Five Divisions Division
_____________ _________ _______ __
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 Eric 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 Eric Division's fixed costs will be eliminated if the division is discontinued.

Is Maggie right about eliminating the Eric Davidson? Prepare a schedule to support your answer.

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Solution Summary

The solution explains how to decide if a division is to be eliminated

Solution Preview

In order to make the decision we need to see what we lose and what are the savings. First we prepare a contribution margin statement:

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