Question

Granfield company is considering eliminating its backpack division, which reported an operating loss for the recent year of $41,400. the division sales for the year were $948,600 and the variable costs were $469,000. the fixed costs of the division were $521,000. if the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. the impact on granfield's operating income for eliminating this business segment would be:

Answer 1

Answer: decrease of $271200 or (217200)

Explanation: (fixed costs * % of fixed costs that can be eliminated) - (contribution margin of division to be eliminated)

(521000*.40) - (948600-469000) = -271200

Answer 2

The impact on Granfield's operating income for eliminating this business segment would be an increase of $208,400. This increasing came from the eliminated fixed cost from the backpack division. This event made Granfield's other business segments could be operated more efficiently. Granfield's will not get any sales and variable cost in the future from the backpack division. Calculation: 40% * $521,000 = $208,400