Reference no: EM132462892
Problem - GMS Company has two independent divisions; the Textbook Division and the Educational CD Division. GMS has provided you with the following analysis:
|
|
Total
|
Textbook Division
|
CD Division
|
|
Sales
|
$1,000,000
|
$600,000
|
$400,000
|
|
Variable Expenses
|
675,000
|
400,000
|
275,000
|
|
Contribution Margin
|
$325,000
|
$200,000
|
$125,000
|
|
Fixed expenses
|
300,000
|
150,000
|
150,000
|
|
Net operating profits
|
$25,000
|
$50,000
|
($25,000)
|
You analyze the fixed expenses and identify the following:
1. The Textbook Division and CD Division independently contract for advertising of their products. Such advertising may be discontinued by either division at any time. Textbook Division advertising cost is $20,000 and CD Division advertising cost is $25,000.
2. Salaries of $15,000 are paid by the Textbook Division and $20,000 by the CD Division.
3. The Textbook Division and CD Division rent separate spaces. If either division is discontinued, their space could be sub-let to a third party for the rent currently paid by that division, thereby eliminating the expense. The Textbook Division pays $55,000 of rent and the CD Division pays $65,000 of rent.
4. Administrative expense is allocated to each division based on sales revenues. These costs will continue to exist if one division is closed. Administrative expense allocated to the Textbook Division is $60,000 and CD Division is $40,000.
Required - What will be the impact on GMS' total net operating profits if the CD Division is discontinued?
a. Net operating profits will decrease by $80,000.
b. Net operating profits will increase by $25,000.
c. Net operating profits will decrease by $125,000.
d. Net operating profits will decrease by $15,000.
e. Net operating profits will increase by $5,000.