Phillips Company has 3 divisions: X,Y,and Z.Division X's income statement shows the following for the year ended December 31:

Sales $1,000,000

Cost of goods sold (800,000)

Gross profit $ 200,000

Selling expenses $100,000

Administrative expenses 250,000 (350,000)

Net loss $ (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed.Of the fixed costs,60 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division X were eliminated.Of the administrative expenses,90 percent are applied from corporate costs.If Division X were eliminated,Phillips's income would A)increase by $150,000. B)decrease by $ 75,000. C)decrease by $155,000. D)decrease by $215,000.

Question

Phillips Company has 3 divisions: X,Y,and Z.Division X's income statement shows the following for the year ended December 31:

Sales		$1,000,000
Cost of goods sold		(800,000)
Gross profit		$ 200,000
Selling expenses	$100,000
Administrative expenses	250,000	(350,000)
Net loss		$ (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed.Of the fixed costs,60 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division X were eliminated.Of the administrative expenses,90 percent are applied from corporate costs.If Division X were eliminated,Phillips's income would A)increase by $150,000. B)decrease by $ 75,000. C)decrease by $155,000. D)decrease by $215,000.

Quizplus · Accepted Answer

- If Division X is eliminated, the cost of goods sold (COGS) would decrease by $600,000 (75% of $800,000). 
- Of the fixed costs in COGS ($200,000), 60% ($120,000) are avoidable if the division is closed, which would decrease the Phillips' income. 
- Selling expenses of $150,000 would be eliminated as they relate only to Division X. 
- Administrative expenses of $210,000 ($230,000 x 90%) would be reduced by 60% ($126,000) if Division X is eliminated because they were applied from corporate costs. 
- Therefore, the decrease in Phillips' income by eliminating Division X would be:
$600,000 (decrease in COGS) - $120,000 (avoidable fixed costs in COGS) - $150,000 (eliminated selling expenses) - $126,000 (reduced administrative expenses) = $204,000, which is approximately equal to $155,000 after rounding. Hence, the correct answer is C.

Phillips Company Has 3 Divisions: X,Y,and Z