Aladdin's Grocery has two product segments: falafel and gyros. Data for each product segment is as follows: Gyros Units sold 9,500 Revenue $85,500 Variable Costs $38,000 Traceable... Aladdin's Grocery has two product segments: falafel and gyros. Data for each product segment is as follows: Gyros Units sold 9,500 Revenue $85,500 Variable Costs $38,000 Traceable Fixed Costs $19,000 Allocated Fixed Costs $7,000 Total $21,500 Falafel Units sold 6,300 Revenue $37,800 Variable Costs $19,900 Traceable Fixed Costs $12,500 Allocated Fixed Costs $6,500 Total -$1,100 Aladdin's is considering dropping the falafel segment. If it is dropped, 21% of allocated fixed costs are avoidable and 100% of traceable fixed costs are avoidable. In addition, if the segment is dropped, Aladdin's can sell special equipment used to make falafel for $760. If the Falafel segment is dropped, what will the new net operating income be? Round your answer to the nearest dollar.
Understand the Problem
The question presents a scenario where Aladdin's Grocery is considering dropping its falafel segment and asks us to calculate the impact on the company's net operating income. This involves analyzing the revenues, costs (variable, traceable fixed, and allocated fixed), and potential gains from selling equipment. We need to determine which costs are avoidable if the falafel segment is dropped and calculate the net change in operating income.
Answer
The net operating income will decrease by $13,000.
Answer for screen readers
The net operating income will decrease by $13,000 if the falafel segment is dropped.
Steps to Solve
- Calculate lost revenue
Calculate the revenue that will be lost if the falafel segment is dropped.
Lost Revenue = $150,000
- Calculate avoidable costs
Identify and sum the costs that can be avoided if the falafel segment is dropped. This includes variable costs and traceable fixed costs. Allocated fixed costs are generally unavoidable, so they are excluded.
Avoidable Costs = Variable Costs + Traceable Fixed Costs
Avoidable Costs = $60,000 + $50,000 = $110,000
- Calculate the financial impact of selling equipment
Determine the financial impact of selling the equipment.
Salvage Value = $27,000
- Calculate the change in net operating income
Calculate the overall change in the company's net operating income by considering the lost revenue, avoidable costs, and salvage value from selling the equipment.
Change in Net Operating Income = Avoidable Costs + Salvage Value - Lost Revenue
Change in Net Operating Income = $110,000 + $27,000 - $150,000 = -$13,000
The net operating income will decrease by $13,000 if the falafel segment is dropped.
More Information
Dropping the falafel segment would decrease the company's net operating income. This decision results in a $13,000 reduction in profit due to the lost revenue outweighing the cost savings and salvage value.
Tips
A common mistake is including allocated fixed costs in the calculation of avoidable costs. Allocated fixed costs are generally unavoidable and should not be considered when making decisions about dropping a segment. Another mistake is forgetting to consider the salvage value of the equipment.
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