b$.$ Assume that discontinuance of the engineering division will enable the company to avoid

$40\%$ of the fixed portion of cost of services and $25\%$ of the fixed operating expenses

allocated to the engineering division.

Calculate the resulting effect on net income. Round all calculated answers to the nearest dollar.

c$.$ Assume that in addition to the cost avoidance in b$.,$ the capacity released by discontinuance

of the engineering division can be used to provide $8,400$ new services that would have a

variable cost per service of $$50$ and would require additional fixed costs totaling $$100,800.$

At what unit price must the new service be sold if Bingham is to increase its total net income by

$$168,000?$ Round answer to two decimal places.Dropping Unprofitable Division

Based on the following analysis of last year$$s operations of Bingham, Inc., a financial vice president of the company believes that the firm$$s total net income could be increased by $$600,000$ if its engineering division were discontinued. $($Amounts are given in thousands of dollars.$)$

All Other Engineering

Last year results Totals Divisions Division

Sales $$15,700$ $$11,200$ $$4,500$

Cost of services:

Variable $(5,560)(3,640)(1,920)$

Fixed $(3,040)(1,960)(1,080)$

Gross profit $7,1005,6001,500$

Operating expenses:

Variable $(4,300)(2,800)(1,500)$

Fixed $(2,280)(1,680)(600)$

Net income $($loss$)$ $$520$ $$1,120$ $$(600)$

a$.$ Assuming that total fixed costs and expenses would not be affected by discontinuing

the engineering division, is the financial vice president's analysis correct?

Answer

Prepare a differential analysis to support your answer.

Discontinuance of Engineering Division

Effect on net income

$($in thousands$)$ Dollars

Increase $($decrease$)$ in revenue Answer

$0$

$($Increase$)$ decrease in cost or expense

Cost of services Answer

$0$

Operating expenses Answer

$0$

Net increase $($decrease$)$ in net income

$0$

b$.$ Assume that discontinuance of the engineering division will enable the company to avoid

$40\%$ of the fixed portion of cost of services and $25\%$ of the fixed operating expenses

allocated to the engineering division.

Calculate the resulting effect on net income. Round all calculated answers to the nearest dollar.

Discontinuance of Engineering Division

Effect on net income

$($in thousands$)$ Dollars

Increase $($decrease$)$ in revenue Answer

$0$

$($Increase$)$ decrease in cost or expense

Variable cost of services Answer

$0$

Variable operating expenses Answer

$0$

Fixed cost of services Answer

$0$

Fixed operating expenses Answer

$0$

Net increase $($decrease$)$ in net income

$0$

c$.$ Assume that in addition to the cost avoidance in b$.,$ the capacity released by discontinuance

of the engineering division can be used to provide $8,400$ new services that would have a

variable cost per service of $$50$ and would require additional fixed costs totaling $$100,800.$

At what unit price must the new service be sold if Bingham is to increase its total net income by

$$168,000?$ Round answer to two decimal places.

$Answer

$0$