Effect of activity level and opportunity cost on segment elimination decision Aquilar Company has three separate operating branches: Division X, which manufactures utensils; Division Y, which makes plates; and Division Z, which makes cooking pots. Each division operates its own facility. The company's administrative offices are located in a separate building. In recent years, Division Z has experienced a net loss and is expected to continue to do so. Income statements for 2011 follow.

Required
a. Based on the preceding information, recommend whether to eliminate Division Z. Support your answer by preparing companywide income statements before and after eliminating Division Z.
b. During 2011, Division Z produced and sold 30,000 units of product. Would your recommendation in Requirement a change if sales and production increase to 45,000 units in 2012? Support your answer by comparing differential revenue and avoidable cost for Division Z, assuming that 45,000 units are sold.
c. Suppose that Aquilar could sublease Division Z's manufacturing facility for $740,000. Would you operate the division at a production and sales volume of 45,000 units, or would you close it? Support your answer with appropriate computations.

Division X Division Y Division 2 Sales Less: Cost of goods sold Unit-level manufacturing costs Rent on manufacturing facility Gross margin Less: Operating expenses Unit-level selling and admin. expenses Division-level fixed selling and admin. expenses Administrative facility-level costs Net income (loss) $1,500,000 $1,800,000 $1,400,000 (1,100,000) (580,000) (400,000) (360,000) 240,000 (240,000) (220,000) (60,000) (140,000) (80,000) (45,000) (125,000) (80,000) (90,000) (180,000) (80,000) $(110,000) $ 180,000 $ 350,000