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14 July, 04:05

ranfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,000. The division sales for the year were $960,000 and the variable costs were $475,000. The fixed costs of the division were $527,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield's operating income for eliminating this business segment would be:

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  1. 14 July, 07:38
    0
    The 40% saving on fixed assets will increase Granfield overall operating income by $210,800

    Explanation:

    If Granfield discontinues it backpack division, below is the saving from fixed cost:

    Avoidable fixed cost (40%) = 40% * $527,000

    =$210,800

    The $210,800 saving will increase Granfield overall operating income.

    The 60% balance of the fixed cost is a sunk cost and will not have any impact on the operating income.

    Hence, a decision has to be made whether to continue with the segment $42,000 operating loss or discontinue the operation to have savings of $210,800.
  2. 14 July, 07:45
    0
    If discontinued, then their operating income will decrease by 168,800

    It is a better deal to continue the backpack division active.

    Explanation:

    sales 960,000

    variable cost (475,000)

    contribution 485,000

    fixed cost (527,000)

    loss (42,000)

    if Dropped

    40% of fixed cost are unavoidable

    527,000 x 40% = (210,800)

    Difference: 42,000-210,800 = (168,800)
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