Question - Allwise has three divisions: Baker, Coral, and Demper. The results of May, 2011 are presented below:
|
|
Baker
|
Coral
|
Demper
|
Total
|
|
Units sod
|
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. Allwise allocates indirect fixed costs based on the number of units to be sold. Since Coral division has a net loss, Allwise feels that it should be discontinued. Allwise feels if the division is closed, the sales at the Baker division will increase by 20%, and the sales at the Demper division will stay the same.
A. Prepare an analysis showing the effect of discontinuing the Coral division.
B. Should Allwise close the Coral division? Briefly indicate why or why not.