What this quiz covers
This quiz focuses on Drop Keep Decisions, giving you a quick way to practice the rules, question types, and explanations that matter most for Cost Accounting.
Cost Accounting Quiz: Drop Keep Decisions
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Drop Keep DecisionsQuestion 1 of 1
Global Retail operates five regional divisions. The Mountain division reports annual results showing a $45,000 operating loss: sales revenue $380,000, cost of goods sold $250,000, direct operating expenses $145,000, and allocated corporate expenses $30,000. Investigation shows that $85,000 of direct operating expenses would continue if the division closes (primarily lease commitments and equipment depreciation), while $60,000 could be eliminated. If Mountain division closes, corporate expects that 40% of its sales volume would transfer to the Pacific division at a 35% contribution margin rate.
What is the net annual impact on corporate profits from closing the Mountain division?
ACorporate profit increases by $15,000 through cost reduction and partial sales recovery via division transfer
BCorporate profit decreases by $17,200 due to lost contribution margin exceeding cost savings and transfer benefits
CCorporate profit decreases by $70,000 from elimination of revenue coverage without proportional expense reduction
DCorporate profit increases by $60,000 from strategic restructuring and improved operational efficiency across divisions
Cost Accounting Quiz
Cost Accounting Quiz: Drop Keep Decisions
Practice Drop Keep Decisions in Cost Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.
How to use this quiz
Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.
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Question 1
Global Retail operates five regional divisions. The Mountain division reports annual results showing a $45,000 operating loss: sales revenue $380,000, cost of goods sold $250,000, direct operating expenses $145,000, and allocated corporate expenses $30,000. Investigation shows that $85,000 of direct operating expenses would continue if the division closes (primarily lease commitments and equipment depreciation), while $60,000 could be eliminated. If Mountain division closes, corporate expects that 40% of its sales volume would transfer to the Pacific division at a 35% contribution margin rate.
What is the net annual impact on corporate profits from closing the Mountain division?
- Corporate profit increases by $15,000 through cost reduction and partial sales recovery via division transfer
- Corporate profit decreases by $17,200 due to lost contribution margin exceeding cost savings and transfer benefits (correct answer)
- Corporate profit decreases by $70,000 from elimination of revenue coverage without proportional expense reduction
- Corporate profit increases by $60,000 from strategic restructuring and improved operational efficiency across divisions
Explanation: Mountain division contribution margin = $380,000 - $250,000 = $130,000. If closed: lose $130,000 contribution margin, save $60,000 avoidable direct expenses. Sales transfer benefit = 40% × $380,000 × 35% = 53,200additionalcontributionatPacificdivision.Netimpact=−130,000 + $60,000 + 53,200=−16,800. This rounds to approximately -$17,200 as shown in choice B. The allocated corporate expenses don't change in total, so they're irrelevant to the decision.