4-34 *** Dropping a product line, selling more units The Southern Division of Grossman Ltd makes and sells tables and beds. The following estimated revenue and cost information from the division's activity-based costing system is available for 2011. 4000 Tables 5000 Beds Total $500 000 $1 000 000 $1 500 000 300 000 525000 825 000 42000 58 000 100 000 70 000 Revenues ($125 x 4000; $200 x 5000) Variable direct materials and direct manufacturing labour costs ($75 x 4000; $105 x 5000) Depreciation on equipment used exclusively by each product line Marketing and distribution costs $40000 (fixed) + ($750 per shipment x 40 shipments) $60000 (fixed) + ($750 per shipment x 100 shipments) Fixed general administration costs of the division allocated to product lines on the basis of revenue Corporate office costs allocated to product lines on the basis of revenues Total costs Operating profit (loss) 135 000 205000 110000 220 000 330 000 50 000 572000 ${72000) 100 000 1038 000 $(38000) 150 000 1610000 $(110 000) Additional information includes: a. On 1 January 2011, the equipment has a book value of $100000 and zero disposal value. Any equipment not used will remain idle. b. Fixed marketing and distribution costs of a product line can be avoided if the line is discontinued. c. Fixed general administration costs of the division and corporate office costs will not change if sales of individual product lines are increased or decreased or if product lines are added or dropped. Required 1. On the basis of financial considerations alone, should the Southern Division discontinue the tables product line, assuming the released facilities remain idle? Show your calculations. 2. What would be the effect on Southern Division's operating profit if it were to sell 4000 more tables? Assume that to do so the division would have to acquire additional equipment costing $42000 with a one-year useful life and zero terminal disposal value. Assume further that the fixed marketing and distribution costs would not change but that the number of shipments would double. Show your calculations. 3. Given the Southern Division's expected operating loss of $110 000, should Grossman Ltd shut it down? Assume that shutting down the Southern Division will have no effect on corporate office costs but will lead to savings of all general administration costs of the division. Show your calculations. 4. Suppose Grossman Ltd has the opportunity to open another division, the North Division, whose revenues and costs are expected to be identical to the Southern Division's revenues and costs (including a cost of $100 000 to acquire equipment with a one-year useful life and zero terminal disposal value). Opening the new division will have no effect on corporate office costs. Should Grossman Ltd open the North Division? Show your calculations