FINANCIAL ACCOUNTING
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![### Assessing the Impact of Eliminating a Business Segment
Gion Company is considering eliminating its windows division, which reported an operating loss for the recent year of $125,000. Division sales for the year were $1,310,000 and its variable costs were $1,175,000. The fixed costs of the division were $270,000. If the windows division is dropped, 60% of the fixed costs allocated to it could be eliminated. The impact on Gion’s operating income from eliminating this business segment would be:
#### Multiple Choice Options:
1. $56,700 decrease
2. $27,000 increase
3. $162,000 decrease
4. $162,000 increase
5. $27,000 decrease
#### Explanation:
The decision revolves around understanding the contribution each segment provides to the operating income and calculating how much of the fixed costs would remain even if the division is eliminated.
- **Sales:** $1,310,000
- **Variable Costs:** $1,175,000
Operating income (loss) before any fixed costs:
\[ \text{Operating Income} = \text{Sales} - \text{Variable Costs} = \$1,310,000 - \$1,175,000 = \$135,000 \]
Adding the fixed costs:
\[ \text{Total Operating Loss} = \$135,000 - \$270,000 = \$-135,000 \]
If the division is eliminated, and 60% of the fixed costs can be removed, then:
\[ \text{Fixed Costs to Remove} = 60\% \times \$270,000 = \$162,000 \]
The fixed costs remaining:
\[ \text{Fixed Costs Remaining} = \$270,000 - \$162,000 = \$108,000 \]
Impact on operating income:
\[ \text{Impact on Income} = \$135,000 - \$108,000 = \$27,000 \]
With the elimination, this would be an increase in operating income. Therefore, the correct answer is:
\[ \$27,000 \text{ increase} \]
#### Conclusion:
The analysis shows that eliminating the windows division will result in an increase of $27,000 in Gion Company's operating income.](https://content.bartleby.com/qna-images/question/f3a97e71-1b3a-4f55-a51e-000c057267c3/3acfe0f1-aacf-42ea-9968-a62635e55a21/md81oqf_processed.png)
Transcribed Image Text:### Assessing the Impact of Eliminating a Business Segment
Gion Company is considering eliminating its windows division, which reported an operating loss for the recent year of $125,000. Division sales for the year were $1,310,000 and its variable costs were $1,175,000. The fixed costs of the division were $270,000. If the windows division is dropped, 60% of the fixed costs allocated to it could be eliminated. The impact on Gion’s operating income from eliminating this business segment would be:
#### Multiple Choice Options:
1. $56,700 decrease
2. $27,000 increase
3. $162,000 decrease
4. $162,000 increase
5. $27,000 decrease
#### Explanation:
The decision revolves around understanding the contribution each segment provides to the operating income and calculating how much of the fixed costs would remain even if the division is eliminated.
- **Sales:** $1,310,000
- **Variable Costs:** $1,175,000
Operating income (loss) before any fixed costs:
\[ \text{Operating Income} = \text{Sales} - \text{Variable Costs} = \$1,310,000 - \$1,175,000 = \$135,000 \]
Adding the fixed costs:
\[ \text{Total Operating Loss} = \$135,000 - \$270,000 = \$-135,000 \]
If the division is eliminated, and 60% of the fixed costs can be removed, then:
\[ \text{Fixed Costs to Remove} = 60\% \times \$270,000 = \$162,000 \]
The fixed costs remaining:
\[ \text{Fixed Costs Remaining} = \$270,000 - \$162,000 = \$108,000 \]
Impact on operating income:
\[ \text{Impact on Income} = \$135,000 - \$108,000 = \$27,000 \]
With the elimination, this would be an increase in operating income. Therefore, the correct answer is:
\[ \$27,000 \text{ increase} \]
#### Conclusion:
The analysis shows that eliminating the windows division will result in an increase of $27,000 in Gion Company's operating income.
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