The Dropinsky Company's Management Wants to Determine If Division Y $$\text { Segmnented Income Statement }$$

question 18

Essay

The Dropinsky Company's management wants to determine if Division Y should be eliminated.The following data are available (in thousands).
$$\text { Segmnented Income Statement }$$
$\begin{array}{lrrrr}&\text { Division } \mathrm{X} & \text { Division } \mathrm{Y} & \text { Division } \mathrm{Z} & \text { Total }\\\text { Sales } & \$ 200 & \$ 300 & \$ 400 & \$ 900 \\\text { Less variable costs } & \frac{80}{} & \underline{150} & \underline{160} & \underline{390} \\\text { Contribution margin } & \$ 120 & \$ 150 & \$ 240 & \$ 510 \\\text { Less direct fixed costs } & \underline{70} & \underline{170} & \underline{120} & \underline{360} \\\text { Segment margin } & \underline{\$ 50} & \underline{\$ 20)} & \underline{\$ 120} & \$ 150 \\\text { Less common fixed costs } & & & & \underline{90} \\\text { Operating income } & & & & \$ 60\end{array}$
a. Assuming all direct fixed costs of Division Y are avoidable, what would be the change in operating income if Division Y were eliminated?
b. Assuming one-half of the direct fixed costs of Division Y are avoidable, what would be the change in operating income if Division Y were eliminated?

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Definitions:

Accounting Profits

The financial gains of a company calculated by subtracting total expenses from total revenues according to standard accounting practices.

Economic Profits

The financial difference between what a business earns in total revenue and what it spends, considering both explicit and indirect costs.

Implicit Costs

The opportunity costs involved in using resources that a firm already owns, for which it does not make a direct payment.

Accounting Profits

The total revenue of a business minus the explicit costs associated with producing goods or services, not accounting for implicit costs.