Problem 2 - Should we close a division? Dale Corporation has four divisions and has the following income statement for a recent quarter: Sales Cost of Goods Sold Gross Profit Selling Expenses Marketing Expenses Admin Expenses Net Income A 300,000 180,000 120,000 40,000 45,000 30,000 5,000 B 400,000 240,000 160,000 75,000 60,000 30,000 (5,000) 750,000 450,000 300,000 75,000 112,500 30,000 82,500 D 550,000 330,000 220,000 55,000 82,500 30,000 52,500 Total 2,000,000 1,200,000 800,000 245,000 300,000 120,000 135,000 Dale is trying to determine if Division B should be closed. Additional information is as follows: Sales and cost of goods sold would stay the same for the remaining divisions Selling expenses would stay the same for the remaining divisions Marketing expenses would be reduced by 20% and are allocated based on revenues. Total administrative expenses would remain the same and are allocated evenly among the remaining divisions. Required Prepare a new income statement assuming that division B is closed. 300,000 C 750,000 D 550,000 Total 1,600,000 Sales Cost of Goods Sold 180,000 450,000 330,000 960,000 Gross Profit 120,000 300,000 220,000 640,000 40,000 75,000 55,000 170,000 Selling Expenses Marketing Expenses Admin Expenses Net Income Marketing Expenses first we need to calculate the new total marketing expenses: Current Marketing Expenses (all divisions) Reduction % Reduction amount (current amount x reduction %) New Marketing Expenses (current - reduction amount) Next we need to allocate those expenses among the three remaining divisions: New Marketing Expenses New Total Sales Allocation Rate Allocated to A Allocated to C Allocated to D Make sure that the three allocations add up to the total on line 1. Administrative Expenses: Finally, take the total administration expenses and divide them evenly among the three remaining divisions. Analysis Should Blair close division B? Support your answers with amounts from your answers