Karim Ahmed, a recent graduate of an accounting program, evaluated the operating performance of Lunar Company's four divisions. Karim Ahmed made the following presentation

to the Lunar board of directors and suggested the Riffa Division be eliminated. *If the Riffa Division is eliminated, she said, "our total profits would increase by "$20,000."

Sales

Cost of goods sold

Gross profit

Operating expenses

Net income

The Other Four Riffa

Divisions

Division

$1,600.000

$110.000

950,000

80.000

650,000

30,000

500,000

50,000

$150,000

($20,000)

In the Riffa Division, cost of goods sold is $65,000 variable and $15,000 fixed, and operating expenses are $40,000 variable and $10,000 fixed. None of the Riffa Division's fixed

costs will be eliminated if the division is discontinued.

Required:

(1) Prepare an incremental analysis to eliminate or keep a division decision. (6.5 marks)

(2) Is Karim Ahmed right about eliminating the Riffa Division? Why or why not? (1.5 marks)

to the Lunar board of directors and suggested the Riffa Division be eliminated. "If the Riffa D The Other Four Riffa Divisions Division Sales $1,600,000 $110,000 Cost of goods sold 950,000 80,000 Gross profit 650,000 30,000 Operating expenses 500,000 50,000 Net income $150,000 ($20,000) In the Riffa Division, cost of goods sold is $65,000 variable and $15,000 fixed, and op costs will be eliminated if the division is discontinued. Required: (1) Prepare an incremental analysis to eliminate or keep a division decision. (6.5 m