Reference no: EM132640756

Jan Shumard, president and general manager of Danbury Company. was concerned about the future of one of the company's largest divisions. The division's most recent quarterly income statement follows: Sales $3,751,500 Less: Cosr of goods sold 2,722,400 Gross pro?t $1,029,100 Less: Selling and administrative expenses 1,100,000 Operating (loss) $ 170,900) Ian is giving serious consideration to shutting down the division because this is the ninth consecutive quarter that it has shown a loss. To help him in his decision, the following additional information has been gathered: The division produces one product at a selling price of $100 to outside parties. The division sells 50% of its output to another division within the company for $83 per unit (full manufacturing cost plus 25%). The internal price is set by company policy. If the division is shut down, the user division will buy the part externally for $100 per unit. The fixed overhead assigned per unit is $20. All of this cost will be eliminated except the salary of the production manager; because he is the Ian's son, he will be simply assigned to another division (salary is $100,000). Of the fixed selling and administrative expenses, 30% represent allocated expenses from corporate headquarters; the remainder are avoidable. Variable selling expenses are $5 per unit sold for units sold externally. These expenses are avoided for internal sales. No variable administrative expenses are incurred.

Required:

Problem A. Prepare an income statement that more accurately re?ects the division's profit performance. (Note: you may first construct it using all costs separated into a segment margin statement; but remember to identify relevant revenues and costs when answering part B).

Problem B. Should the president shut down the division? What will be the effect on the company's profits if the division is closed?