Celestial Inc. is organized into 3 distinct divisions. The company is currently contemplating the elimination of either Division 1 or Division 2 because they are showing a pre-tax loss. An annual income statement follows.

a. How would the company's pre-tax profit be affected if it dropped Division 1?

b. How would the company's pre-tax profit be affected if it dropped Division 2?

Transcribed Image Text:

(in 5000s) Sales... Division 1 Division 2 Division 3 Total $5,300 $8,200 $30,240 $43,740 Cost of sales. 3,920 7,000 18,144 29,064 Gross margin $1,380 $1,200 $12,096 $14,676 Avoidable fixed costs* 1,484 600 5,836 7,920 Avoidable variable costs* 280 300 2,900 3,480 Allocated fixed costs... 252 940 1,764 2,956 Operating profit... $ (636) $ (640) $ 1,596 $ 320