Lenox Manufacturing Co. produces and sells specialized equipment used in the petroleum industry. The company is organized into three separate operating branches: Division A, which manufactures and sells heavy equipment; Division B, which manufactures and sells hand tools; and Division C, which makes and sells electric motors. Each division is housed in a separate manufacturing facility. Company headquarters is located in a separate building. In recent years, Division B has been operating at a net loss and is expected to continue to do so. Income statements for the three divisions for 2016 follow.

Required
a. Based on the preceding information, recommend whether to eliminate Division B. Support your answer by preparing companywide income statements before and after eliminating Division B.
b. During 2017, Division B produced and sold 20,000 units of hand tools. Would your recommendation in response to Requirement a change if sales and production increase to 30,000 units in 2018? Support your answer by comparing differential revenue and avoidable cost for Division B, assuming that it sells 30,000 units.
c. Suppose that Lenox could sublease Division B's manufacturing facility for $160,000. Would you operate the division at a production and sales volume of 30,000 units, or would you close it? Support your answer with appropriate computations.

Transcribed Image Text:

Divislon A Divlslon B Divislon C Sales Less: Cost of goods sold $1,000,000 $300,000 $1,250,000 Unit-level manufacturing costs Rent on manufacturing facility (600,000) (135,000) 265,000 (200,000) 75,0 (750,000) (100,000) 400,000 Gross margin Less: Operating expenses 25,000 (62,500) (80,000) 72,500 (14,000) Unit-level selling and admin. expenses Division-level fixed selling and (78,000) (100,000) 172,000 admin. expenses Headquarters facility-level costs (20,000) 0,00 (59,000) 0,0 50 Net income (loss)