The Cook Corporation has two divisions--East and West. The divisions have the following revenues and expenses:

The Cook Corporation has two divisions--East and West. The divisions have the following revenues and expenses:

	East			West
Sales	$	500,000		$	550,000
Variable costs		200,000			275,000
Traceable fixed costs		150,000			180,000
Allocated common corporate costs		135,000			170,000
Net operating income (loss)	$	15,000		$	(75,000	)

The management of Cook is considering the elimination of the West Division. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income (loss) of:

Garrison 16e Rechecks 2017-12-15

Multiple Choice

• $15,000
• ($155,000)

  Correct
• ($75,000)
• ($60,000)

Explanation

Effect on net operating income of dropping the West Division:

Sales	$	(550,000	)
Variable expenses		275,000
Contribution margin		(275,000	)
Traceable fixed expenses		180,000
Effect on net operating income	$	(95,000	)

The company currently has a net operating loss of $60,000—the combined effect of the apparent $75,000 loss in the West Division and the apparent $15,000 profit in the East Division. Dropping the West Division would reduce net operating income by $95,000. Therefore, after dropping the West Division, the overall company net operating loss would be $155,000 = (−$60,000 – $95,000).