Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2016 are presented below.

Bud Wise Er Total

Units sold 3,000 5,000 2,000 10,000

Revenue $70,000 $50,000 $40,000 $160,000

Less variable costs 32,000 26,000 16,000 74,000

Less direct fixed costs 14,000 19,000 12,000 45,000

Less allocated fixed costs 6,000 10,000 4,000 20,000

Net income $18,000 $ (5,000) $ 8,000 $ 21,000

All of the allocated costs will continue even if a division is discontinued. Milwaukee allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Milwaukee feels that it should be discontinued. Milwaukee feels if the division is closed, that sales at the Bud division will increase by 12%, and that sales at the Er division will stay the same.

Instructions

(a) Prepare an analysis showing the effect of discontinuing the Wise division.

(b) Should Milwaukee close the Wise division? Briefly indicate why or why not.