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Anderson Document Services, a document creation and copying company, has two departments, Design and Copying....

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Accounting

Anderson Document Services, a document creation and copying company, has two departments, Design and Copying. The companys most recent monthly contribution format income statement follows:

Department
Total Design Copying
Sales $ 115,000 $ 35,000 $ 80,000
Variable expenses 70,750 22,750 48,000
Contribution margin 44,250 12,250 32,000
Fixed expenses 24,640 15,400 9,240
Operating income (loss) $ 19,610 $ (3,150 ) $ 22,760

A study indicates that $6,600 of the fixed expenses being charged to the Design Department are sunk costs or allocated costs that will continue even if the Design Department is dropped. In addition, the elimination of the Design Department would result in a 5% decrease in the sales of the Copying Department.

Required:
a.

If the Design Department is dropped, what will be the effect on the operating income of the company as a whole?

b. Should the Design department be dropped?
multiple choice

  • Yes

  • No

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