Question
Zachary Manufacturing Co. produces and sells specialized equipment used in the petroleum industry. The company is organized into three separate operating branches: Division A, which
Zachary 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 2016 follow.
Division A | Division B | Division C | |||||||||
Sales | $ | 4,500,000 | $ | 1,170,000 | $ | 4,400,000 | |||||
Less: Cost of goods sold | |||||||||||
Unit-level manufacturing costs | (2,900,000 | ) | (832,000 | ) | (2,780,000 | ) | |||||
Rent on manufacturing facility | (510,000 | ) | (280,000 | ) | (500,000 | ) | |||||
Gross margin | 1,090,000 | 58,000 | 1,120,000 | ||||||||
Less: Operating expenses | |||||||||||
Unit-level selling and admin. expenses | (197,000 | ) | (56,810 | ) | (247,000 | ) | |||||
Division-level fixed selling and admin. expenses | (330,000 | ) | (84,000 | ) | (329,000 | ) | |||||
Headquarters facility-level costs | (190,000 | ) | (190,000 | ) | (190,000 | ) | |||||
Net income (loss) | $ | 373,000 | $ | (272,810 | ) | $ | 354,000 | ||||
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 26,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 38,000 units in 2018?
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c. Suppose that Zachary could sublease Division Bs manufacturing facility for $420,000, at a production and sales volume of 38,000 units, Calculate the contribution to profit of Division B.
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