E7-12 (Static) Analyzing Keep-or-Drop Decision [LO 7-2, 7-5]

Anderson Publishing has two divisions: Book Publishing & Magazine Publishing. The Magazine division has been losing money for the last 5 years and Anderson is considering eliminating that division. Andersons information about the two divisions is as follows:

	Book Division				Magazine Division				Total
Sales Revenue	$	7,800,000			$	3,300,000			$	11,100,000
Cost of Goods sold
Variable costs		2,000,000				997,000				2,997,000
Fixed costs		1,077,500				1,200,000				2,277,500
Gross Profit	$	4,722,500			$	1,103,000			$	5,825,500
Operating Expenses
Variable		135,000				198,000				333,000
Fixed		2,916,000				1,189,000				4,105,000
Net income	$	1,671,500			$	(284,000	)		$	1,387,500

Only 20 percent of the fixed manufacturing costs and 60 percent of the fixed operating expenses are directly attribute to each division. The remainder are common or shared between the two divisions.