An accounting graduate analyzed the performance of Boswell Company's four divisions and recommended eliminating the Southern Division to increase total net income by $60,000. However, the document shows that eliminating the Southern Division would only reduce fixed operating costs by $10,000, while $95,000 in fixed costs would still be incurred. Continuing the Southern Division would result in a $60,000 loss, while eliminating it would lead to a $95,000 loss. Therefore, the recommendation to eliminate the Southern Division should not be agreed with, as it would worsen the total loss.
----SHOW ALL COMPUTATIONS---- A recent accounting graduate from Missou.docx
1. ****SHOW ALL COMPUTATIONS****
A recent accounting graduate from Missouri State University evaluated the operating
performance of Boswell Company's four divisions. The following presentation was made to
Boswell's Board of Directors. During the presentation, the accountant made the recommendation
to eliminate the Southern Division stating that total net income would increase by $60,000. (See
analysis below.)
Other Three Divisions Southern Division       Total
Sales                 $2,000,000           Â
$480,000Â Â Â Â Â Â Â Â Â $2,480,000
Cost of Goods Sold      950,000          Â
400,000Â Â Â Â Â Â Â Â 1,350,000
Gross Profit           1,050,000             Â
80,000Â Â Â Â Â Â Â Â Â Â 1,130,000
Operating Expenses      800,000           140,000      Â
    940,000
Net Income           $  250,000           $
(60,000)Â Â Â Â Â Â Â $Â Â 190,000
For the other divisions, cost of goods sold is 80% variable and operating expenses are 70%
variable. The cost of goods sold for the Southern Division is 35% fixed, and its operating
expenses are 75% fixed. If the division is eliminated, only $10,000 of the fixed operating costs
will be eliminated.
Instructions
Do you agree with the recommendation to eliminate the Southern division? Present a schedule to
support your answer.
****SHOW ALL COMPUTATIONS****
2. Solution
no, i wont agree with his presentation. because even if we stop the production from southern
division, the fixed cost is (i.e. 75% of operating costs) 105,000 and if we eliminte it we can
reduce only 10,000 fixed cost. the remaining $95,000 will be loss only.
if we running the division, the loss is $60,000 and if we eliminate it the loss is $95,000.
so, continue the production from the division.