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Question - Allwise has three divisions: Baker, Coral, and Demper. The results of May, 2011 are presented below:
Baker
Coral
Demper
Total
Units sod
3,000
5,000
2,000
10,000
Revenue
$70,000
$50,000
$40,000
$160,000
Less variable costs
32,000
26,000
16,000
74,000
Less direct fixed costs
14,000
19,000
12,000
45,000
Less allocated fixed costs
6,000
4,000
20,000
Net income
$18,000
-$5,000
$8,000
$21,000
All of the allocated costs will continue even if a division is discontinued. Allwise allocates indirect fixed costs based on the number of units to be sold. Since Coral division has a net loss, Allwise feels that it should be discontinued. Allwise feels if the division is closed, the sales at the Baker division will increase by 20%, and the sales at the Demper division will stay the same.
A. Prepare an analysis showing the effect of discontinuing the Coral division.
B. Should Allwise close the Coral division? Briefly indicate why or why not.
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