The Joyful Decision of Hart Corporation
What would be the operating income for Hart Corporation if the Aloy Division were dropped?
a. $133,000
b. $112,000
c. $91,000
d. $49,000
Answer:
The operating income for Hart Corporation, as a whole, if the Aloy Division were dropped would be $49,000. So, the answer is option D: $49,000.
If Hart Corporation were to drop the Aloy line, the segment margin would increase by the amount of the segment margin of the Aloy Division, which is $147,000. However, the common cost allocation would also be eliminated. The total common costs that would be eliminated is $182,000.
If the Aloy line is dropped, the common cost allocated to the Will Division would increase by $182,000. This would result in a new total allocated common cost of $728,000 ($546,000 + $182,000).
The following table shows the calculation:
Will Division (if Aloy Division is dropped)Sales $560,000 Less: Variable costs $364,000 Contribution margin $196,000 Less: Direct fixed costs $42,000 Segment margin $154,000 Plus: Common cost allocation $728,000. Total cost allocation $882,000 Operating income (loss) ($686,000).
Hence, the operating loss would be $686,000 if the Aloy Division is dropped. If this loss is subtracted from the current operating income of $637,000, the result is an operating loss of $49,000. Therefore, the operating income for Hart Corporation, as a whole, if the Aloy Division were dropped would be $49,000.
To know more about operating income, refer here