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 North Division were eliminated, its traceable fixed expenses of $90,000 would be avoided. However, the common corporate expenses of $200,000 would still need to be allocated between the remaining South Division and the overall company.

Using the direct method of allocation based on revenue, the common corporate expenses would be allocated as follows:

South Division: ($350,000 ÷ $550,000) x $200,000 = $128,000 
Overall Company: ($200,000 - $128,000 =$72,000

Therefore, South Division would have a net operating income of $250,000 - $240,000 (variable expenses + traceable fixed expenses) - $128,000 (allocated common corporate expenses) = -$118,000.

The overall company would have a net operating income of $350,000 - $240,000 (variable expenses + traceable fixed expenses for South Division) - $90,000 (eliminated North Division traceable fixed expenses) - $72,000 (allocated common corporate expenses) = -$52,000.

Overall, eliminating the North Division would result in a net operating loss of $52,000 for the company. Therefore, the best choice is C) $(140,000).

The Kelsh Company Has Two Divisions--North and South