Question

Pacific Division has the following information:
Sales $1,200,000
Variable expenses 640,000
Fixed expenses 620,000
If this division is eliminated, the fixed expenses will be allocated to the company's other divisions. What is the incremental effect on net income if the division is dropped?

Answer 1

Answer:

it will be a net loss of 560,000

It is better to produce at a loss of 60,000 than a loss of 620,000

That's because, the Division cover a good portion of their allocate fixed cost.

Explanation:

The fixed expense are allocate cost. Are unavoidable cost It will remain even if the division is dropped.

The sales and variable cost will be zero.

$\left[\begin{array}{cccc}&Continued&Discontinued&Differential\\Sales&1,200,000&0&-1,200,000\\Variable&-640,000&0&640,000\\Allocate cost&-620,000&-620,000&0\\Result&-60,000&-620,000&-560,000\\\end{array}\right]$

After posting the values, we calculate the differential income.

In this case it will be a loss for 560,000