Manuel Inc. produces textiles in many different forms. After recording lower than anticipated profits last year, Manuel has decided to shut down one of its divisions that is not performing well. The accounting manager has compiled the following data on the two divisions being considered for closing and asked you to evaluate the short-term and long-term effects on profits for each division. Which division should be closed?
Winter Outerwear High-End Suits
Net revenues.................................$1,000,000................$5,000,000
Variable costs ...................................500,000..................2,000,000
Contribution margin...........................$500,000................$3,000,000
Controllable fixed costs................................0..................2,000,000
Controllable margin...........................$500,000................$1,000,000
Noncontrollable fixed costs..................750,000................$1,500,000
Contribution by CPC.....................$ (250,000) ...............$ (500,000)