{"id":220698,"date":"2025-05-28T16:02:55","date_gmt":"2025-05-28T16:02:55","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=220698"},"modified":"2025-05-28T16:02:57","modified_gmt":"2025-05-28T16:02:57","slug":"the-milham-company-has-two-divisions-east-and-west-the-divisions-have-the-following-expenses-and-revenues","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/05\/28\/the-milham-company-has-two-divisions-east-and-west-the-divisions-have-the-following-expenses-and-revenues\/","title":{"rendered":"The Milham Company has two divisions – East and West The Divisions have the following expenses and revenues."},"content":{"rendered":"\n
The Milham Company has two divisions – East and West The Divisions have the following expenses and revenues. East West Sales [\u2022 5720,000 $350,000 Variable Costs … $370,000 $240,000 Traceable fixed costs $130,000 $80,000 Allocated common costs $120,000 $50,000 Net operating income (loss) $100,000 ($20,000) Management at Milham is pondering the elimination of the West Division since it has shown an operating loss for the past several years. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, how would the elimination of the West Division affect overall company net operating income?<\/p>\n\n\n\n
The Correct Answer and Explanation is:<\/mark><\/strong><\/p>\n\n\n\n
Answer:<\/strong><\/h3>\n\n\n\n
If the West Division were eliminated<\/strong>, the overall company net operating income would decrease by $30,000<\/strong>.<\/p>\n\n\n\n\n\n\n\n
Explanation<\/strong><\/h3>\n\n\n\n
To assess how eliminating the West Division<\/strong> would affect the Milham Company\u2019s total net operating income (NOI)<\/strong>, we need to distinguish between avoidable<\/strong> and unavoidable costs<\/strong>:<\/p>\n\n\n\n
\n
Variable Costs<\/strong> and Traceable Fixed Costs<\/strong> are avoidable<\/strong>, i.e., they go away with the division.<\/li>\n\n\n\n
Allocated Common Costs<\/strong> are unavoidable<\/strong> \u2013 they remain even if the division is shut down. These are not relevant for decision-making in this context.<\/li>\n<\/ul>\n\n\n\n
Let\u2019s break down the current net operating income of the West Division<\/strong>:<\/p>\n\n\n\n
Allocated Common Costs:<\/strong> $50,000<\/li>\n\n\n\n
Net Operating Income:<\/strong> ($20,000) Loss<\/em><\/li>\n<\/ul>\n\n\n\n
However, since the $50,000 in allocated common costs<\/strong> would remain even if the West Division is eliminated<\/strong>, removing the division would mean the company no longer earns $350,000 in revenue<\/strong>, saves $240,000 in variable costs<\/strong>, and saves $80,000 in traceable fixed costs<\/strong>.<\/p>\n\n\n\n
So, what is the net benefit\/loss<\/strong> from keeping the division?<\/p>\n\n\n\n
Let\u2019s calculate the contribution margin<\/strong> of the West Division:<\/p>\n\n\n\n
This $30,000 represents the segment margin<\/strong>, i.e., the amount the West Division contributes toward covering common fixed costs and profit<\/strong>.<\/p>\n\n\n\n
If the West Division is eliminated, the company loses this $30,000 contribution, and the $50,000 in allocated common costs will still be there, reducing the company\u2019s overall profitability.<\/p>\n\n\n\n
Conclusion:<\/strong> Eliminating the West Division will decrease<\/strong> the overall company\u2019s net operating income by $30,000<\/strong>, and thus it should not be eliminated<\/strong>, even though it shows a loss after allocation.<\/p>\n\n\n\n<\/figure>\n","protected":false},"excerpt":{"rendered":"
The Milham Company has two divisions – East and West The Divisions have the following expenses and revenues.East West Sales [\u2022 5720,000 $350,000 Variable Costs … $370,000 $240,000 Traceable fixed costs $130,000 $80,000 Allocated common costs $120,000 $50,000 Net operating income (loss) $100,000 ($20,000)Management at Milham is pondering the elimination of the West Division since […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-220698","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/220698","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=220698"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/220698\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=220698"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=220698"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=220698"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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