You are the new Chief Financial Officer for Callahan Automotive and have been asked by the Chief Executive Officer to take a look at the Muffler Division. The other two divisions of Callahan Automotive, the Brake Pad Division and the Oil Filter Division are performing well financially, however the Muffler Division has shown a loss for the past three quarters and the CEO is considering dropping the division. Discontinuing the muffler division would not affect the company's sales of its other product lines, its total general factory overhead, or its total purchasing department expenses.
Below is the Muffler Division's income statement for the current quarter.
Callahan Automotive
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Income Statement - Muffler Division
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For the Quarter Ended June 30
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Sales
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$450,000
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Variable Expenses
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Variable Manufacturing Overhead
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$130,000
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Sales Commissions
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$ 48,000
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Shipping
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$ 12,000
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Total Variable Expenses
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$190,000
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Contribution Margin
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$ 260,000
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Fixed Expenses
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Salary of Product Line Manager
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$ 21,000
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General Factory Overhead *
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$104,000
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Depreciation of Equipment (no resale value)
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$ 36,000
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Advertising - traceable
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$110,000
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Insurance on inventories
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$ 9,000
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Purchasing Department
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$ 50,000
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Total Fixed Expenses
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$330,000
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Net Operating Loss
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$ (70,000)
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allocated on the basis of machine-hours
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** allocated on the basis of sales dollars
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Would you recommend to the CEO that the company discontinue the Muffler Division?Support your answer with appropriate computations. Include in your response which line items on the income statement are relevant to this decision and why.