Valdez Company is considering eliminating its kitchen division, which reported an operating loss of $53,000 for the past year. Kitchen division sales for the year were $1,040,000, and its variable costs were $775,000. The fixed costs of the division were $318,000. If the kitchen division is dropped, 60% of the foxed costs allocated to it could be eliminated. The impact on Valdez's operating income from eliminating this business segment would be:

$200,000

Explanation:

The impact on Valdez's operating income from eliminating this business segment would be:

= Saving in fixed costs - Loss of contribution margin

= ($775,000*60%) - ($1,040,000 - $775,000)

= $465,000 - $265,000

= $200,000

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