Problem 2 Should we close a division?

Dale Corporation has four divisions and has the following income statement for a recent quarter:

	A	B	C	D	Total
Sales	300,000	400,000	750,000	550,000	2,000,000
Cost of Goods Sold	180,000	240,000	450,000	330,000	1,200,000
Gross Profit	120,000	160,000	300,000	220,000	800,000
Selling Expenses	40,000	75,000	75,000	55,000	245,000
Marketing Expenses	45,000	60,000	112,500	82,500	300,000
Admin Expenses	30,000	30,000	30,000	30,000	120,000
Net Income	5,000	(5,000)	82,500	52,500	135,000

Dale is trying to determine if Division B should be closed. Additional information is as follows:

• Sales and cost of goods sold would stay the same for the remaining divisions
• Selling expenses would stay the same for the remaining divisions
• Marketing expenses would be reduced by 20% and are allocated based on revenues.
• Total administrative expenses would remain the same and are allocated evenly among the remaining divisions.

Required

Prepare a new income statement assuming that division B is closed.

	A	C	D	Total
Sales	300,000	750,000	550,000	1,600,000
Cost of Goods Sold	180,000	450,000	330,000	960,000
Gross Profit	120,000	300,000	220,000	640,000
Selling Expenses	40,000	75,000	55,000	170,000
Marketing Expenses
Admin Expenses
Net Income

Hints and Helpers

Marketing Expenses first we need to calculate the new total marketing expenses:

Current Marketing Expenses (all divisions)
Reduction %
Reduction amount (current amount x reduction %)
New Marketing Expenses (current reduction amount)

Next we need to allocate those expenses among the three remaining divisions:

New Marketing Expenses
New Total Sales
Allocation Rate
Allocated to A
Allocated to C
Allocated to D

Make sure that the three allocations add up to the total on line 1.

Administrative Expenses: Finally, take the total administration expenses and divide them evenly among the three remaining divisions.

Analysis

Should Blair close division B? Support your answers with amounts from your answers.