Maurice Tutor
$15/per page/Negotiable
EXERCISE 12–8 Dropping or Retaining a Segment [LO2]
Anderson Document Services, a document creation and copying company, has two depart- ments, Design and Copying. The company’s most recent monthly contribution format income statement follows:
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|
 |
Total |
 |
Design |
Copying |
|
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$400,000 |
 |
$75,000 |
$200,000 |
|
Variable expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
  250,000 |
 |
 50,000 |
  120,000 |
|
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
150,000 |
 |
25,000 |
80,000 |
|
Fixed expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
   50,000 |
 |
 30,000 |
   18,000 |
|
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$ 10,000 |
 |
$(5,000) |
$ 62,000 |
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A study indicates that $14,000 of the fixed expenses being charged to the Design Department are sunk costs or allocated costs that will continue even if the Design Department is dropped. In addition, the elimination of the Design Department would result in a 5% decrease in the sales of the Copying Department.
Required:
If the Design Department is dropped, what will be the effect on the operating income of the company as a whole? Should the Design Department be dropped?