Question

Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.
BETTY’S FASHIONS, CITY DIVISION
Divisional Income Statement
For the Year Ending January 31
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,300,000
Costs
Advertising—City Division . . . . . . . . . . . . . . . . . 175,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 2,150,000
Divisional administrative salaries . . . . . . . . . . . . 290,000
Selling costs (sales commissions) . . . . . . . . . . . 580,000
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735,000
Share of corporate administration . . . . . . . . . . . . 475,000
Total costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,405,000
Net loss before income tax benefit . . . . . . . . . . . $ (105,000)
Tax benefit at 40% rate . . . . . . . . . . . . . . . . . . . . 42,000
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (63,000

Required
What revenues and costs are probably differential for the decision to discontinue City Division’s operations? What will be the effect on Betty’s profits if the division is eliminated?



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  • CreatedDecember 18, 2013
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