Dropping Unprofitable Division Based on the following analysis of last years operations of

Groves, Inc., a financial vice president of the company believes that the firms total net income could

be increased by $160,000 if its design division were discontinued. (Amounts are given in thousands

of dollars.)

Totals /All Other Divisions/ Design Division

Sales. . . . . . . . . . . . . . . . . . . . . . $18,800 $14,400 $4,400

Cost of services:

Variable . . . . . . . . . . . . . . . . . . (7,600) (5,600) (2,000)

Fixed . . . . . . . . . . . . . . . . . . . . (4,800) (4,000) (800)

Gross profit . . . . . . . . . . . . . $ 6,400 $ 4,800 $1,600

Operating expenses:

Variable . . . . . . . . . . . . . . . . . . (3,360) (2,000) (1,360)

Fixed . . . . . . . . . . . . . . . . . . . . (1,600) (1,200) (400)

Net income (loss) . . . . . . . . . . . . $ 1,440 $ 1,600 $ (160)

Required

Provide answers for each of the following independent situations:

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

division, prepare an analysis showing why you agree or disagree with the vice president.

b. Assume that discontinuance of the design division will enable the company to avoid 30% of the

fixed portion of cost of services and 40% of the fixed operating expenses allocated to the design

division. Calculate the resulting effect on net income.

c. Assume that in addition to the cost avoidance in requirement (b), the capacity released by discon-

tinuance of the design division can be used to provide 6,000 new services that would have a vari-

able cost per service of $60 and would require additional fixed costs totaling $68,000. At what

unit price must the new service be sold if Groves is to increase its total net income by $180,000?