Engel Company has 3 divisions: A,B,and C.Division A's income statement shows the following for the year ended December 31:

Sales $1,500,000

Cost of goods sold (1,125,000)

Gross profit $ 375,000

Selling expenses $125,000

Administrative expenses 350,000 (475,000)

Net loss $ (100,000)

Cost of goods sold is 80 percent variable and 20 percent fixed.Of the fixed costs,50 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division A were eliminated.Of the administrative expenses,85 percent are applied from corporate costs.If Division A were eliminated,Engel's income would

Question

Engel Company has 3 divisions: A,B,and C.Division A's income statement shows the following for the year ended December 31:

Sales		$1,500,000
Cost of goods sold		(1,125,000)
Gross profit		$ 375,000
Selling expenses	$125,000
Administrative expenses	350,000	(475,000)
Net loss		$ (100,000)

Cost of goods sold is 80 percent variable and 20 percent fixed.Of the fixed costs,50 percent are avoidable if the division is closed.All of the selling expenses relate to the division and would be eliminated if Division A were eliminated.Of the administrative expenses,85 percent are applied from corporate costs.If Division A were eliminated,Engel's income would

Quizplus · Accepted Answer

If Division A is eliminated, the company would save the costs that are directly attributable to Division A, as well as any avoidable fixed costs.

Variable costs saved = 80% * $3,000,000 = $2,400,000

Fixed costs saved = 20% * $3,000,000 * 50% = $300,000

Selling expenses saved = $600,000

Administrative expenses saved = $1,000,000 * 85% = $850,000

Total costs saved = $4,150,000

Therefore, Engel's income would decrease by $4,150,000 if Division A is eliminated.

Engel Company Has 3 Divisions: A,B,and C