The operations of Smits Corporation are divided into the Childs Division and the Jackson Division.Projections for the next year are as follows: $\begin{array}{lrrr}&\text { Childs } & \text { Jackson } & \
&\text { Division } & \text { Division } & \text { Total }\
\text { Sales } & \$ 250,000 & \$ 180,000 & \$ 430,000 \
\text { Variable costs } & 90.000 & 100.000 & 190.000\
\text { Contribution margin } & \$ 160,000 & \$ 80,000 & \$ 240,000 \
\text { Direct fixed costs } & 75,000 & 62,500 & 137,500\
\text { Segment margin } & \$ 85,000 & \$ 17,500 & \$ 102,500 \
\text { Allocated common costs } & 35,000 & 27,500 & 62,500 \
\text { Operating income (loss) } & \$ 50,000 & \$(10,000) & \$ 40,000
\end{array}$ Suppose the Jackson Division were dropped.What would be the operating income for Smits Corporation?
A) $22,500
B) $40,000
C) $50,000
D) $60,000

Question

Quizplus · Accepted Answer

If the Jackson Division is dropped, Smits Corporation would lose the segment margin of $17,500 from Jackson but would save the direct fixed costs of $62,500. The allocated common costs of $27,500 would still remain. Therefore, the operating income would be $50,000 (current operating income) - $17,500 (lost segment margin) + $62,500 (saved direct fixed costs) = $95,000. However, the common costs of $27,500 would still be incurred, so the net effect is $95,000 - $27,500 = $67,500. But since the question asks for the operating income after dropping Jackson, the correct answer is $22,500 ($50,000 - $27,500).

The Operations of Smits Corporation Are Divided into the Childs