The Cabinet Division of Woodworking Inc. has struggled to earn a profit for the past several years. Company management is considering whether to eliminate the division. The division’s most recent income statement is shown at the top of the next page. If the division is eliminated, corporate administrative costs will not change for the company as a whole. A portion of division administrative salaries, $150,000, will remain with the company because some of the more experienced personnel will be moved to the main office.

Required

a. Identify the revenues and costs that would be differential for the decision to discontinue the division. $3,000,000;

b. What would you recommend?

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Woodworking Inc. Cabinet Division Income Statement For the Year Ended December 31 Revenue Expenses: Cost of goods sold $1,950,000 Selling costs 250,000 Division administrative salaries 650,000 Rent (division facilities) 175,000 Share of corporate administrative costs 400,000 Total expenses Operating loss $3,000,000 3,425,000 $ (425,000)