Question

DJH Enterprises has 3 departments. Operating results for 2019 are as follows:

Department 1 Department 2 Department 3
Sales $670,000 $322,000 $856,000
Variable costs 445,000 287,000 602,000
Contribution margin $225,000 $35,000 $254,000
Direct fixed expenses $120,000 $27,000 $163,000
Common fixed expenses 75,000 30,000 94,000
Total fixed expenses $195,000 $57,000 $257,000
Operating income (loss) $30,000 ($22,000) ($3,000)

DJH is considering eliminating the departments that show losses. Assume that the direct fixed expenses could be avoided if the department is eliminated. What effect would elimination of Department 2 have on DJ H's total operating income?

Answer 1

Answer:

DJH Enterprises

The effect of eliminating Department 2 will increase the total operating income to $27,000 from $5,000.

Explanation:

a) Data and Calculations:

Operating Results for 2019 for the three departments:

                                     Department 1  Department 2 Department 3 Total

                                                                                                              ('000)

Sales                                 $670,000      $322,000       $856,000   $1,848

Variable costs                     445,000        287,000         602,000      1,334

Contribution margin        $225,000        $35,000       $254,000      $514

Direct fixed expenses      $120,000        $27,000        $163,000      $310

Common fixed expenses    75,000          30,000            94,000        199

Total fixed expenses       $195,000        $57,000       $257,000       509

Operating income (loss)   $30,000       ($22,000)         ($3,000)        $5

Loss-making departments eliminated:

                                     Department 1    Department 3        Total                                                      

Sales                                 $670,000       $856,000       $1,526,000

Variable costs                     445,000         602,000         1,047,000

Contribution margin        $225,000       $254,000        $479,000

Direct fixed expenses      $120,000        $163,000        $283,000

Common fixed expenses    75,000            94,000           169,000

Total fixed expenses       $195,000       $257,000        $452,000

Operating income (loss    $30,000          ($3,000)            27,000