Mary Myers, a recent graduate of Rolling’s accounting program, evaluated the operating performance of Shaw Company’s six divisions. Mary made the following presentation to Shaw’s Board of Directors and suggested the Erie Division be eliminated. “If the Erie Division is eliminated,” she said, “our total profits would increase by $24,500.”

In the Erie Division, cost of goods sold is $60,000 variable and $16,500 fixed, and operating expenses are $25,000 variable and $23,000 fixed. None of the Erie Division’s fixed costs will be eliminated if the division is discontinued.

Instructions

Is Mary right about eliminating the Erie Division? Prepare a schedule to support your answer.

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The Other Erie Total $1,764,200 1,055,020 709,180 575,940 Five Divisions Division Sales Cost of goods sold Gross profit Operating expenses Net income $1,664,200 978,520 685,680 527,940 S 157,740 $100,000 76,500 23,500 48,000 $ (24,500) 133,240