The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses: Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of:
A)$100,000
B)$150,000
C)$(140,000)
D)$50,000

Question

The Kelsh Company has two divisions--North and South. The divisions have the following revenues and expenses:  Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of:
A)$100,000 
B)$150,000 
C)$(140,000) 
D)$50,000

Quizplus · Accepted Answer

If we eliminate the North division, its traceable fixed cost of $200,000 will be saved. However, the South division will also incur an additional $40,000 of direct fixed cost, which was previously borne by North division. Therefore, the net effect on operating income will be a decrease of $160,000 ($200,000 - $40,000).
So, the overall company net operating income will decrease by $160,000 if the North division is eliminated. Therefore, the correct choice is C.

The Kelsh Company Has Two Divisions--North and South