A recent accounting graduate evaluated the operating performance of Fane Company's three divisions. The following presentation was made to Fane's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division, stating that total net income would increase by $20,000 as shown in the analysis below.
- Other Two Divisions Southern Division Total
- Sales $1,000,000 $300,000 $1,300,000
- cost of Goods Sold 650,000 200,000 850,000
- Gross Profit 350,000 100,000 450,000
- Operating Expenses 100,000 120,000 220,000
- Net Income $250,000 $(20,000) $230,000
Cost of goods sold is 75% variable and operating expenses are 70% variable. If the division is eliminated, 40% of the fixed costs will be eliminated.