Carns Company Is Considering Eliminating Its Small Tools Division,which Reported

question 55

Multiple Choice

Carns Company is considering eliminating its small tools division,which reported an operating loss for the recent year of $85,000.Division sales for the year were $1,310,000 and its variable costs were $1,175,000.The fixed costs of the division were $220,000.If the kitchen division is dropped,45% of the fixed costs allocated it could be eliminated.The impact on Carns's operating income from eliminating the small tools division would be:

• A)$74,200 decrease
• B)$36,000 decrease
• C)$220,000 decrease
• D)$36,000 increase
• E)$99,000 decrease

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Definitions:

Total Revenue

The total income generated by a firm or economy from its sale of goods and services, calculated before any expenses are subtracted.

Profit Maximizing

The process by which a firm determines the price and output level that returns the greatest profit, often involving analysis of marginal costs and marginal revenues.

Shutdown

The short-term decision by a firm to cease production due to operating at a loss, where total revenue is not covering variable costs.

Implicit Costs

These refers to the opportunity costs that are not directly paid or incurred but represent the foregone benefits from using resources in a particular way.