Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2013 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. Milwaukee allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Milwaukee feels that it should be discontinued. Milwaukee feels if the division is closed, that sales at the Bud division will increase by 12%, and that sales at the Er division will stay the same.