Respuesta :
The impact on the company's operating income for eliminating this business segment would be $274,200 decrease. Hence, option (c) will be regarded as the suitable option.
Give a brief account on Operating income.
Operating income is an accounting metric that represents the amount of profit generated by a company's operations after operating costs like salaries, depreciation, and cost of goods sold (COGS) are subtracted. Operating income is calculated by deducting all operating expenses from a company's gross income, which is equal to total revenue minus COGS. Office supplies and utilities are examples of the kind of costs that are included in an organization's operating expenses. Operating income is a metric that reveals how much of a company's revenue will ultimately turn into profits when taking into account its business operations. It's a way to gauge how much money a business makes by solely considering its core operational activities.
To solve the question :
Elimination of fixed costs = $210,800 (40% of $527,000)
Contribution = $485,000 ($960,000 - $475,000)
Impact on operating income = Elimination of fixed costs − Contribution loss
= $210,800 − $485,000
= −$274,200
$274,200 decrease
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The complete question is mentioned below :
Granfield 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:
a) $485,000 decrease
b) $210,800 increase
c) $274,200 decrease
d) $485,000 increase
e) $274,200 increase
