Janet Cosgrove is the manager of Saratoga Sporting Goods, a division of Global Sports. Cosgrove’s division sells a variety of sporting goods and supplies to wholesalers and retail chains throughout the Pacific Northwest and Latin America. Saratoga Sporting Goods has a single manufacturing facility located in Florida. As the manager of Saratoga Sporting Goods, Cosgrove is paid a salary and a bonus based on the profit she generates for the company. Recently, Cosgrove has been contemplating selling a warehouse owned by the division in Jacksonville. She has gathered the following information regarding the warehouse.
Acquisition date .......... 10/10/1994
Acquisition price .......... $ 17,500,000
Accumulated depreciation ....... $ 5,300,000
Current market value ......... $ 7,000,000
Because the company has adopted JIT-based inventory management, the warehouse is no longer needed to store finished goods inventory. Furthermore, if the warehouse were sold, the $7,000,000 of current market value would be realized on the sale. Cosgrove has consulted you, the CFO of the division, about the effect of the warehouse sale on divisional profits. You provided Cosgrove the following calculation:
Sales price .................... $ 7,000,000
Less net book value ($17,500,000 – $5,300,000) ...... (12,200,000)
Projected profit (loss) on sale ............. $ (5,200,000)
a. Discuss whether the loss that would be recognized on the sale is relevant to the decision to sell the warehouse.
b. What would you recommend that Cosgrove do with respect to the warehouse?