Shea Corporation is organized by divisions and is currently operating with an Eastern, Western and Northern Division. Overall, the company has been profitable but Shea is worried about their Northern Division which has been showing losses. You have been provided the following information regarding the Northern Division of Shea Corporation which makes and sells tables and beds.

	Tables	Beds	Total
Revenues	$495,000	$2,805,000	$3,300,000
Cost of goods sold	344,500	2,248,250	2,592,750
Gross profit	150,500	556,750	707,250
Operating Expenses:
Marketing and distribution costs	69,550	200,350	269,900
General Administration	89,250	505,750	595,000
Operating Income (Loss)	-8,300	-149,350	-157,650

The following information was obtained from the accounting records:

The company sold 4500 tables for $110 each and 8250 beds for $340 each.

Cost of goods sold includes the following:

o Direct materials and direct manufacturing labor which vary for each item sold total $65 per table and $265 per bed.

o Straight-line depreciation on machinery which is used exclusively by each product line was computed at $52,000 for the table line and $62,000 for the bed line. The equipment has a one year life and no disposal value and any equipment not used will remain idle.

Divisional costs related to the Norther Division consist of marketing and distribution costs and general/administration costs.

o Marketing and distribution costs include a fixed and variable element. The variable element varies per shipment and shipment sizes are consistent. Costs are broken down as follows:

Tables: $34,000 fixed plus $790 per shipment X 45 shipments

Beds: $70,000 fixed plus $790 per shipment X 165 shipments

o The divisional general/administration costs are fixed and are allocated between the product lines based upon revenues.

Corporate office costs (included with divisional general/administration) and are fixed and also allocated to product lines on the basis of revenue. Overall corporate office costs allocated to the Northern Division total $175,000.

Eighty percent of fixed marketing and distribution costs allocated to a product line can be avoided if the line is discontinued.

Fixed general-administration costs of the division and corporate office costs will not change is the company increases or decreases sales of individual product lines or if it adds or drops product lines

Required:

1. On the basis of financial considerations alone, should the Northern Division discontinue the Tables product line for the year, assuming the released facilities remain idle? Show your calculations indicating how much operating income would change if the Tables product line were discontinued.

2. If Northern Division sold 4000 more tables, how would that affect its operating income? Assume that to sell more tables, the division would have to acquire additional equipment costing $52,000 with a one-year useful life and zero terminal disposal value. Assume further that the fixed marketing and distribution costs would not change but that the number of shipments would increase accordingly. Show your calculations.

3. Given the Northern Divisions expected operating loss of $157,650, should Shea Corporation shut it down for the year? Assume that shutting down the Northern Division will have no effect on corporate- office costs but will lead to savings of all general-administration costs of the division. Show your calculations.

4. Suppose Shea corporation has the opportunity to open another division, the Southern Division, whose revenues and costs are expected to be identical to the Northern Divisions revenues and costs (Including a cost of $114,000 to acquire equipment with a 1-year useful life and zero terminal disposal value). Opening the new division will have no effect on corporate-office costs.

a. Based upon financial considerations alone, should Shea open the Southern Division? Show your calculations.

b. What other factors should Shea consider in the decision regarding opening the Southern division.