The Cook Co. has two divisions, Eastern and Western. The divisions have the following revenue and expenses:

The management of Cook is considering the closure of the Eastern Division sales office. If the Eastern Division was closed, the fixed costs associated with this division could be avoided but allocated corporate costs would continue.

a. Calculate the effect on Cook’s operating profit before and after the closure. Should the Eastern Division be closed? Show calculations.

b. The manager of Cook believes that if the Eastern Division is closed, the Western Division will have an increase of $200,000 in sales. If this prediction proved true, should the company close the Eastern Division? Show calculations.

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Eastern Western Sales $550,000 $500,000 Variable costs 275,000 200,000 Divisional fixed costs 180,000 150,000 Allocated corporate costs 170,000 135,000