Question
Beta Company has two divisions, Wizards and Wands. Beta is considering discontinuing Wands, due to the divisions continuing operating losses. Betas current income statement is
Beta Company has two divisions, Wizards and Wands. Beta is considering discontinuing Wands, due to the divisions continuing operating losses. Betas current income statement is presented below.
If Wands is discontinued, all employees of the division will be laid off. General expenses are allocated based on sales dollars and are not directly related to individual product lines.
|
| Total |
| Wizards |
| Wands |
Sales | $ | 1,000,000 | $ | 800,000 | $ | 200,000 |
Variable manufacturing and selling expenses |
| 500,000 |
| 350,000 |
| 150,000 |
Contribution Margin | $ | 500,000 | $ | 450,000 | $ | 50,000 |
Fixed Expenses: |
|
|
|
|
|
|
Depreciation | $ | 28,000 | $ | 12,000 | $ | 6,000 |
Product line managers salaries |
| 100,000 |
| 60,000 |
| 60,000 |
General expenses |
| 90,000 |
| 67,500 |
| 12,500 |
Total fixed expenses | $ | 218,000 | $ | 139,500 | $ | 78,500 |
Net operating income (loss) | $ | 282,000 | $ | 310,500 | $ | ($28,500) |
The financial advantage (disadvantage) of discontinuing Wands is:
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