Mikkee Corporation has three departments. Data for the most recent year is prese
ID: 2417066 • Letter: M
Question
Mikkee Corporation has three departments. Data for the most recent year is presented below. There are $20 in corporate headquarters fixed costs that are not traceable to individual departments. Should any department(s) be dropped? Which one(s) and why? What is the effect on operating income if your advice is followed? Without regard to your answer for (a) above, suppose that Departments B and C are both eliminated. What is the new operating income for the Mikkee Corporation? Suppose that a decision to drop Department B will free up capacity that can be used by Department A, and will save Mikkee $49 per year. Should Mikkee drop Department B in this case?Explanation / Answer
a) Department B & C should be dropped. Because both are giving Operating losses ($(14) by B and $(22) by C). If it is followed then the Operating income will be $104 b) New Operating Income Particulars Sales Variable costs Contribution Margin Department fixed costs: Unavaidable Avoidable Allocated fixed costs Operating income c) Yes. Mikkee should drop department B. Anyway it is giving Operating loss. If it dropped the department A can make additional revenue of $49 per year