Tri-Cities Inc. has three divisions: Boone, Lenoir, and Hickory. The results of August, 2012 are presented below.

All of the allocated costs will continue even if a division is discontinued. Tri-Cities allocates indirect fixed costs based on the number of units to be sold. Since the Lenoir division has a net loss, Tri-Cities feels that it should be discontinued. Tri-Cities feels if the division is closed, that sales at the Boone division will increase by 10%, and that sales at the Hickory division will stay the same.
Instructions
(a)Prepare an analysis showing the effect of discontinuing the Lenoir division.
(b)Should Tri-Cities close the Lenoir division? Briefly indicate why or why not.

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Total Boone 3,000 $70,000 Lenoir Hickory 2,000 $40,000 Units sold 10,000 5,000 Revenue $50,000 S160,000 26,000 Less variable costs 32,000 14,000 16,000 12,000 74,000 Less direct fixed costs 19,000 45,000 Less allocated fixed costs 6,000 10,000 $ (5.000) 4,000 20,000 $ 21.000 Net income $ 8,000 $18.000