Segment Line Decision

Garden Fresh Produce has two operating divisions: Wholesale and Resale. Sales in the Wholesale division are generated by salespeople who market fresh fruits and vegetables to grocery stores. The Retail division is comprised of two store outlets who sell directly to consumers. Income statements for each segment covering the most recent fiscal year follow:

			Wholesale		Retail
Sales		$2,000,000		$950,000
Variable Expenses:
	Cost of goods sold	$1,200,000		$600,000
	Commissions to salespeople	$200,000		$100,000
	Truck-related delivery costs	$250,000		$0
Fixed Expenses:
	Taxes, insurance, depreciation	$0		$150,000
	Salaries of division managers	$80,000		$75,000
	Allocated corporate salaries	$100,000		$65,000
Total expenses	$1,830,000		$990,000
Net Income (loss)	$170,000		($40,000)

Management is concerned about profitability in the Retail division and the company is considering the possibility of closing the retail stores and renting the space. Management estimates that the stores could generate a combined rent of $160,000 per year. If either division is eliminated the division manager would be dismissed. The depreciation, taxes, and insurance on the real estate would be unaffected by renting the stores.

Required:

1. What figures would you need to calculate to determine which alternative is the best for the firm? Calculate them here.
2. What is the net advantage/disadvantage of continuing to operate the retail stores as opposed to renting the space?