The Northern Division of Shea Corporation makes and sells tables and beds. The following estimated revenue and cost information from the division’s ABC system is available for 2013.

Additional information includes the following:
a. On January 1, 2013, the equipment has a book value of $ 114,000, a 1- year useful life, and zero disposal value. Any equipment not used will remain idle.
b. Fixed marketing and distribution costs of a product line can be avoided if the line is discontinued.
c. Fixed general- administration costs of the division and corporate- office costs will not change if the company increases or decreases sales of individual product lines or if it adds or drops product lines.

1. On the basis of financial considerations alone, should the Northern Division discontinue the tables product line for the year, assuming the released facilities remain idle? Show your calculations.
2. If Northern Division sold 4,000 more tables, how would that affect its operating income? Assume that to sell more beds the division would have to acquire additional equipment costing $ 52,000 with a one- year useful life and zero terminal disposal value. Assume further that the fixed marketing and distribution costs would not change but that the number of shipments would double. Show your calculations.
3. Given the Northern Division’s expected operating loss of $ 157,650, should Shea Corporation shut it down for the year? Assume that shutting down the Northern Division will have no effect on corporate- office costs but will lead to savings of all general- administration costs of the division. Show your calculations.
4. Suppose Shea Corporation has the opportunity to open another division, the Southern Division, whose revenues and costs are expected to be identical to the Northern Division’s revenues and costs (including a cost of $ 114,000 to acquire equipment with a 1- year useful life and zero terminal disposal value). Opening the new division will have no effect on corporate- office costs. Should Shea open the Southern Division? Show yourcalculations.

  • CreatedJanuary 15, 2015
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