. Elimination of a Product Line. The Halverson's Old General Store is currently divided into three departments. Over the past several months, sales and profit have declined, although the situation is now considered stable. Department 2 has begun to show a loss; and the owner, Joan Halverson, is thinking of discontinuing it. The space could be rented to a chain shoe store which would pay a flat fee of \(\$ 12,000\) a month.

Below is last month's income statement, considered to be typical. Sales salaries are fixed but traceable to each department and could be avoided if the department were eliminated. Total fixed administrative costs (allocated equally to all departments) are common costs.

\section*{Required:}
Prepare an analysis to show Halverson whether Department 2 should be discontinued and the space rented.

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Sales Costs: Cost of goods sold. Department 1 Department 2 Department 3 Total $185,000 $80,000 $135,000 $400,000 $ 96,000 $44,000 $ 70,000 $210,000 28,000 8,000 24,000 60,000 Sales salaries ... Administrative expenses. 30,000 30,000 Total costs $154,000 $82,000 Income before income tax $ 31,000 $ (2,000) 30,000 $124,000 $ 11,000 90,000 $360,000 $ 40,000