A recent accounting graduate from The Applied Science Private University evaluated the operating performance of ABC Company’s four divisions. The following presentation was made to ABC’s Board of Directors. During the presentation, the accountant made the recommendation to eliminate the YYY Division stating that total net income would increase by $60,000. (See analysis below.) Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Other Three Divisions $2,000,000 950,000 1,050,000 800,000 $ 250,000 YYY Division $480,000 400,000 80,000 140,000 $ (60,000) Total $2,480,000 1,350,000 1,130,000 940,000 $ 190,000 For the other divisions, cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the YYY Division is 30% fixed, and its operating expenses are 75% fixed. If the division is eliminated, only $15,000 of the fixed operating costs will be eliminated. Required Do you concur with the new accountant’s recommendation? Present a schedule to support your answer. Solution Sales Cogs Operating expenses Total variable Contribution margin Fixed expenses Cost of goods sold Operating expenses Total fixed Net income (loss) continue 480000 320000 98000 418000 62000 eliminate 0 0 0 0 Net income (480000) 320000 98000 418000 (62000) 80000 42000 122000 (60000) 80000 27000 122000 (107000) 0 15000 0 $(47000) The incremental analysis shows that net income will be $(47000) less if the YYY division is eliminated .This amount not equals the Contribution margin that would be lost by discontinuing division.