Ranfield company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,000. the division sales for the year were $960,000 and the variable costs were $475,000. the fixed costs of the division were $527,000. if the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. the impact on granfield's operating income for eliminating this business segment would be:

If discontinued, then their operating income will decrease by 168,800

It is a better deal to continue the backpack division active.

Explanation:

sales                  960,000

variable cost    (475,000)

contribution      485,000

fixed cost          (527,000)

loss                     (42,000)

if Dropped

40% of fixed cost are unavoidable

527,000 x 40% = (210,800)

Difference: 42,000-210,800 = (168,800)

The 40%  saving on fixed assets will increase Granfield overall operating income by $210,800

Explanation:

If Granfield discontinues it backpack division, below is the saving from fixed cost :

Avoidable fixed cost (40%)= 40% * $527,000

                                            =$210,800

The $210,800 saving will increase Granfield overall operating income.

The 60% balance of the fixed cost is a sunk cost and will not have any impact on the operating income.

Hence, a decision has to be made whether to continue with the segment $42,000 operating loss or discontinue the operation to have savings of $210,800.

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