Question

Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $41,500. The division sales for the year were $950,500 and the variable costs were $470,000. The fixed costs of the division were $522,000. 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

The impact of eliminating the backpack division

Particulars Amount

Decrease in contribution margin $480,500 ($950500-$470,000)

Decrease in Expenses:

Fixed expenses $208,800 ($70522,000*40%)

Decrease in Net operating income $271,700 (Financial disadvantage)