Judy Herzog, a recent graduate of Rolling’s accounting program, evaluated the operating performance of Klumpe Company’s six divisions. Judy made the following presentation to the Klumpe board of directors and suggested the Ketchum Division be eliminated. “If the Ketchum Division is eliminated,” she said, “our total profits would increase by $16,870.”

In the Ketchum Division, cost of goods sold is $56,000 variable and $20,470 fixed, and operating expenses are $12,000 variable and $26,600 fixed. None of the Ketchum Division’s fixed costs will be eliminated if the division is discontinued.

Instructions

Is Judy right about eliminating the Ketchum Division? Prepare a schedule to support your answer.

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The Other Five Divisions Ketchum Division Total Sales Cost of goods sold Gross profit Operating expenses Net income $1,664,200 $ 98,200 $1,762,400 978,520 685,680 527,940 $ 157,740 76,470 21,730 38,600 $(16,870) 707,410 566,540 $ 140,870