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Continue or Eliminate Analysis

Continue or Eliminate Analysis

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Published by Mary
This paper covers how to create a continue or eliminate analysis for a unprofitable division in a company.
This paper covers how to create a continue or eliminate analysis for a unprofitable division in a company.

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Published by: Mary on Dec 12, 2013
Copyright:Attribution Non-commercial


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Continue or Eliminate Analysis
12/2013 MJC Page 1
Think of the divisions of a company like leaves on an Aspen tree. Like the leaves on an Aspen tree, divisions in a company have a life cycle. It is up to the accountant to help management to determine when to eliminate an old unprofitable division in order to keep the company healthy and productive. If divisions are eliminated at the wrong time, it can result in harm to the entire company just as removing leaves from an Aspen tree could harm the tree. A profitable division is one that produces income, which covers variable cost, fixed cost, and produces a profit. The problem with eliminating unprofitable divisions is that sometimes those divisions are producing income that covers allocated fixed cost. Without those divisions fixed cost would have to be transferred to other profitable divisions, which would reduce profits from those divisions. The end result would be a decrease in income, which would result in an overall drop in net income. It is very important to determine the overall effect of eliminating a division before any action is taken by the company. You must always remember to look at the effects of elimination on the whole. The only exception to this rule is if the company has a replacement division that will be profitable to replace the old unprofitable division. Limited resources often require the replacement of old unprofitable division to make ways for new divisions that can produce a profit. Also note that if a unprofitable division is not covering variable cost, not producing a positive contribution margin, then it should without question be eliminated to prevent future losses.
For a full presentation on the “Continue or Eliminate Analysis” go to this Web link:
Prezi Presentation
Continue or Eliminate Analysis
12/2013 MJC Page 2
Example problem:
Jeni Maynard, a new executive for Francisco Corporation has been evaluating the operating performance of her corporation. She has developed a proposal to eliminate the Gates Division in order to increase profitability. The management of Francisco Corporation has asked your input on this proposal.
Prepare a “Continue or
Eliminate Analysis” to determine if the management of the corporation should accept Jeni’s proposal or not.
Information provided:
The other three Divisions Gates Division Total Sales 1,324,000 120,000 1,444,000 Cost of goods sold 850,000 80,000 930,000 Gross Profit 474,000 40,000 514,000 Operating expenses 260,000 45,000 305,000 Net Income 214,000 (5,000) 209,000
In the Gate’s Division, cost of goods sole is 42,000 variable and 38,000 fixed, and operating expenses are 25,000 variable and 20,000 fixed. None of the Gates Division’s fixed costs will be eliminated if the
division is eliminated. Instructions: 1.
Prepare a
“Continue or Eliminate Analysis.”
Should Francisco Corporation implement Ms. Maynard’s proposal? Why or Why not?

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