Question
KLM has four operating divisions. The budgeted revenues and expenses for each division for 2021 follows: Division A B C D Sales $630,000 $632,000 $960,000
KLM has four operating divisions. The budgeted revenues and expenses for each division for 2021 follows:
Division
A
B
C
D
Sales
$630,000
$632,000
$960,000
$1,240,000
Cost of goods sold
550,000
620,000
765,000
925,000
Selling, general, and administrative expenses
120,000
135,000
144,000
210,000
Operating income/loss
$(40,000)
$(123,000)
$51,000
$105,000
Further analysis of costs reveals the following percentages of variable costs in each division:
Cost of goods sold
90%
80%
90%
85%
Selling, general, and
administrative expenses
50%
50%
60%
60%
Closing down any division would result in savings of 40% of the fixed costs of that division. Top management is very concerned about the unprofitable divisions (A and B) and is considering closing them for the year.
Required:
1-Calculate the increase or decrease in operating income if KLM closes division A.
2-Calculate the increase or decrease in operating income if KLM closes division B.
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