Anheiser has three divisions: Bud, Wise, and Er. The results of May, 2010 are presented below:
|
Bud
|
Wise
|
Er
|
Total
|
|
Units sold
|
3,000
|
5,000
|
2,000
|
10,000
|
|
Revenue
|
$70,000
|
$50,000
|
$40,000
|
$160,000
|
|
Less variable costs
|
32,000
|
26,000
|
16,000
|
74,000
|
|
Less direct fixed costs
|
14,000
|
19,000
|
12,000
|
45,000
|
|
Less allocated fixed costs
|
6,000
|
10,000
|
4,000
|
20,000
|
|
Net income
|
$18,000
|
($5,000)
|
$ 8,000
|
$21,000
|
All of the allocated costs will continue even if a division is discontinued. Anheiser allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Anheiser feels that it should be discontinued. Anheiser feels if the division is closed, that sales at the Bud division will increase by 20%, and that sales at the Er division will stay the same
Instructions
A, Prepare an analysis showing the effect of discontinuing the Wise division.
B. Should Anheiser close the Wise division?