The Kelso Company has two divisions--Eastern and Western. The divisions have the following revenues and expenses:$\begin{array}{l}
&\text { Eastem }&\text { Westem }\
\text {Sales. }&£ 450,000 & £ 400,000 \
\text {Variable expenses }&225,000 & 150,000 \
\text { Traceable fixed expenses.}&130,000 & 105,000 \
\text {Allocated common corporate expenses. }&120,000 & 95,000 \
\text { Net operating income (loss).}&£(25,000)&£ 50,000
\end{array}$
Management of Kelso is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of the Eastern Division would result in an overall company net operating income (loss) of

A)£50,000.
B)(£70,000).
C)£25,000.
D)(£75,000).

Question

The Kelso Company has two divisions--Eastern and Western. The divisions have the following revenues and expenses:$\begin{array}{l}
&\text { Eastem }&\text { Westem }\
\text {Sales. }&£ 450,000 & £ 400,000 \
\text {Variable expenses }&225,000 & 150,000 \
\text { Traceable fixed expenses.}&130,000 & 105,000 \
\text {Allocated common corporate expenses. }&120,000 & 95,000 \
\text { Net operating income (loss).}&£(25,000)&£ 50,000
\end{array}$
Management of Kelso is considering the elimination of the Eastern Division. If the Eastern Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of the Eastern Division would result in an overall company net operating income (loss) of

A)£50,000.
B)(£70,000).
C)£25,000.
D)(£75,000).

Quizplus · Accepted Answer

Eliminating the Eastern Division would remove its sales and variable expenses, but the common corporate expenses would remain unchanged. The calculation for the overall company net operating income (loss) without the Eastern Division would be the current net operating income of the Western Division (£50,000) minus the traceable fixed expenses of the Eastern Division that could be avoided (£130,000), resulting in (£50,000 - £130,000) = (£80,000). However, since the question's provided net operating incomes for each division sum to £25,000 (£50,000 - £25,000), and removing the Eastern Division's loss of £25,000 would theoretically increase the overall net income by that amount, the correct calculation should consider the impact of removing the Eastern Division's loss from the overall net income. The mistake in the initial explanation was in the calculation process, not accounting for the net effect correctly. The correct approach should focus on the net change in income due to the division's elimination, considering only the traceable fixed expenses and the loss it currently incurs.

The Kelso Company Has Two Divisions--Eastern and Western Management of Kelso Is Considering the Elimination of the Eastern