Question 2

8 points

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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."

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 Rifa 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)

points Sev A 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. 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 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. Sales Cost of goods sold Gross profit Operating expenses Net income The Other Four Riffa Divisions $1,600,000 950,000 650,000 500,000 $150,000 Division $110,000 80,000 30,000 50,000 ($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) For the toolhar, press ALT+F10 (PC) or ALT+FN+F10 (Mac)