Req. 1 - 3

Ainsley Corporation has four operating divisions. The budgeted revenues and expenses for each division for 2017 follows: (Click to view the results of each division.) Closing down any division would result in savings of 40% of the fixed costs of that division. Top management is very concerned about the unprofitable divisions (A and B) and is considering closing them for the year. Read the requirements. Data Table A Division B D Sales $ 504,000 $ 948,000 $ 960,000 $ 1,240,000 Cost of goods sold 440,000 930,000 765,000 925,000 Selling, general, and administrative expenses 96,000 202,500 144,000 210,000 Operating income/loss $ (32,000) $ (184,500) $ 51,000 $ 105,000 Further analysis of costs reveals the following percentages of variable costs in each division: Division A B D Cost of goods sold 90 % 80 % 90 % 85 % Selling, general, and administrative expenses 50 % 50 % 60 % 60 % Print Done Read the requirements. Requirement 1. Calculate the increase or decrease in operating income if Ainsley closes division A. Begin by calculating Division A's contribution margin. Division A Sales Contribution margin Now, calculate the fixed costs that will be saved by closing division A. Fixed costs Division A Fixed cost of goods sold Fixed selling, general, and administrative expenses Total fixed costs Fixed costs saved by shutting down division Would operating income increase or decrease? By how much? Does Division A's contribution margin cover its avoidable fixed costs? III Requirement 2. Calculate the increase or decrease in operating income if Ainsley closes division B. Begin by calculating division B's contribution margin. Division B Sales Contribution margin Now, calculate the fixed costs that will be saved by closing division B. Fixed Costs Division B Fixed cost of goods sold Fixed selling, general, and administrative expenses Total fixed costs Fixed costs saved by shutting down division Would operating income increase or decrease? By how much? Does Division A's contribution margin cover its avoidable fixed costs? INI Requirement 3. What other factors should the top management of Ainsley consider before making a decision? O A. Management should consider the role that the divisions' product line plays relative to other product lines. O B. Management should consider the impact on the morale of the remaining employees if the division(s) are closed. O C. Both of the above. OD. Neither of the above, management should make this decision relying only on financial data.