Showerlism has three divisions: Ham, Mer, and Hed. The results of May, 2008 are presented below:

Ham

Units Sold - 3,000

Revenue - 70,000

Less Variable Costs - 32,000

Less Direct fixed costs - 14,000

Less allocated fixed costs - 6,000

Net Income - 18,000

Mer

Units Sold - 5,000

Revenue - 50,000

Less Variable Costs - 26,000

Less Direct fixed costs - 19,000

Less allocated fixed costs - 10,000

Net Income (Loss) - (5,000)

Hed

Units Sold - 2,000

Revenue - 40,000

Less Variable Costs - 16,000

Less Direct fixed costs - 12,000

Less allocated fixed costs - 4,000

Net Income - 8,000

All of the allocated costs will continue even if a division is discontinued. The company allocates indirect fixed costs based on the number of units to be sold. Since the Mer division has a net loss, the company feels that it should be discontinued. The company feels if the division is closed, sales of Ham division will increase by 20%, and sales for Hed division will stay the same.

Required:

1. Prepare an analysis showing the effect of discontinuing the Mer division.

2. Should the company close the Mer division? Briefly indicate why or why not.