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

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

increased by $400,000 if its engineering division were discontinued. (Amounts are given in thousands

of dollars.)

Totals All Other Divisions Engineering Division

Sales. . . . . . . . . . . . . . . . . . . . . . . $11,000 $8,000 $ 3,000

Cost of services:

Variable . . . . . . . . . . . . . . . . . . . (3,880) (2,600) (1,280)

Fixed . . . . . . . . . . . . . . . . . . . . . (2,120)

(1,400) (720)

Gross profit. . . . . . . . . . . . . . . . . . $ 5,000 $4,000 $ 1,000

Operating expenses:

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

Fixed . . . . . . . . . . . . . . . . . . . . . (1,600)

(1,200) (400)

Net income (loss) . . . . . . . . . . . . . $ 400 $ 800 $ (400)

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 engi-

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

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.

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

continuance of the engineering division can be used to provide 6,000 new services that would

have a variable cost per service of $36 and would require additional fixed costs totaling $72,000.

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

$120,000?