Sea Gull Publishers Inc. manufactures fiction books. It is considering dropping its romance novel division, as it has been experiencing a losses over the past few years. The most recently income statement is provided below:

Romance Novel Division Income Statement Sales $1,550,000 Less variable expenses: Direct materials 535,700 Direct labour 645,350 Commissions 232,500 Total variable expenses 1,413,550 Contribution margin 136,450 Less fixed expenses Advertising 50,000 Insurance on romance novels 25,000 Depreciation of equipment (no resale value) 40,000 Supervisors salaries 150,000 General factory overhead 75,000 Total fixed expenses 340,000 Net Loss $(203,550)

The discontinuance of the romance novel division would have no impact on the sales of the other textbook areas. 75% of the advertising expenses are considered general advertising for Sea Gull and are not specifically related to the romance novel division. There are two supervisors of the division who are paid the same salary. The company will be able to move one of the supervisors to a position with a different division. General factory overhead is considered a common cost that is allocated on the basis of machine hours. Required:

Should the romance novel division be dropped? Support your answer with the appropriate calculations. Ensure you provide a conclusion. (5 marks)