Question
Thornton Manufacturing Co. produces and sells specialized equipment used in the petroleum industry. The company is organized into three separate operating branches: Division A, which
Thornton Manufacturing Co. produces and sells specialized equipment used in the petroleum industry. The company is organized into three separate operating branches: Division A, which manufactures and sells heavy equipment; Division B, which manufactures and sells hand tools; and Division C, which makes and sells electric motors. Each division is housed in a separate manufacturing facility. Company headquarters is located in a separate building. In recent years, Division B has been operating at a net loss and is expected to continue to do so. Income statements for the three divisions for 2017 follow.
Division A | Division B | Division C | |||||||||
Sales | $ | 4,200,000 | $ | 1,248,000 | $ | 4,300,000 | |||||
Less: Cost of goods sold | |||||||||||
Unit-level manufacturing costs | (2,600,000 | ) | (888,000 | ) | (2,880,000 | ) | |||||
Rent on manufacturing facility | (410,000 | ) | (285,000 | ) | (400,000 | ) | |||||
Gross margin | 1,190,000 | 75,000 | 1,020,000 | ||||||||
Less: Operating expenses | |||||||||||
Unit-level selling and admin. expenses | (195,500 | ) | (56,280 | ) | (245,500 | ) | |||||
Division-level fixed selling and admin. expenses | (370,000 | ) | (81,000 | ) | (326,000 | ) | |||||
Headquarters facility-level costs | (190,000 | ) | (190,000 | ) | (190,000 | ) | |||||
Net income (loss) | $ | 434,500 | $ | (252,280 | ) | $ | 258,500 | ||||
Required
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a-1. Based on the preceding information, recommend whether to eliminate Division B.
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a-2. Prepare companywide income statements before and after eliminating Division B.
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b. During 2017, Division B produced and sold 24,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 35,000 units in 2018?
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c. Suppose that Solomon could sublease Division B's manufacturing facility for $410,000. Assuming that Division B currently has a production and sales volume of 35,000 units, determine whether Solomon should accept the opportunity to sublease the facility or continue production at Division B.
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