Question 5-Drop Segment [15 marks] Jane Chou, president of Fitter, was concerned about one of the company's divisions - Caltis. Caltis division's most recent quarterly income statement is as follows: Sales $3,751,500 Less: Cost of goods sold (includes variable and $2,722,400 fixed cost) Gross Profit $1,029,100 Less: Selling and administrative expenses $1,100,000 $(70,900) 41,000 (includes variable and fixed cost) Operating (loss) Units sold Jane is giving serious consideration to shutting down the Calits division because this is the tenth consecutive quarter that it has shown a loss. To help her in her decision, the following additional information has been gathered: Caltis division produces one product at a selling price of $100 to outside parties Caltis division sells 50% of its output to another division (Decker) within the company for $83 per unit (full manufacturing cost plus 25%). The internal price is set by company policy. If Caltis division is shut down, Decker division will buy the part externally for $100 per unit. The fixed overhead assigned to cost of goods sold per unit is $20. There is no alternative use for the facilities if shut down. The facilities and equipment will be sold and proceeds invested to produce an income of $25,000 per quarter. Of the fixed selling and administrative expenses, 30% represent allocated expenses from corporate headquarters. Variable selling expenses are $5 per unit sold for units sold externally. These expenses are avoided for internal sales. No variable administrative expenses are incurred. REQUIRED What will be the effect on the company's profits if the division is closed? Should the president shut down the division? (15 marks)