1. Granfield Company is considering eliminating its backpack division, which reported an operatin…

 
   

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1. Granfield Company is considering eliminating its backpack division, which reported an operating loss for the recent year of $42,300. The division sales for the year were $965,700 and the variable costs were $478,000. The fixed costs of the division were $530,000. If the backpack division is dropped, 40% of the fixed costs allocated to that division could be eliminated. The impact on Granfield’s operating income for eliminating this business segment would be:

$275,700 increase

$487,700 decrease

$212,000 increase

$275,700 decrease

$487,700 increase

2. Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $9.50; direct labor, $13.50, variable overhead $2.50 and fixed overhead, $7.50. An outside supplier has offered to sell the product to Paxton for $33.00. Compute the net incremental cost or savings of buying the component.

$2.50 cost per unit.

$7.50 savings per unit.

$0 cost or savings per unit.

$7.50 cost per unit.

$2.50 savings per unit.

3. Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $2,000. The division sales for the year were $1,049,000 and the variable costs were $859,000. The fixed costs of the division were $192,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

$57,600 decrease

$132,400 decrease

$54,700 decrease

$190,000 increase

$190,000 decrease

4. Evaluating and rewarding managers based on absorption basis income can lead to overproduction.

True

False