KEEP OR DISCONTINUE OPERATION PROBLEM 4 Trump Forest Corporation operates two divisions, the Timber Division and the Consumer Division. The Timber Division manufactures and sells logs to paper manufacturers. The Consumer Division operates retail lumber mills which sell a variety of products in the do-it-yourself homeowner market. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2016 are presented below: Timber Division $1,500,000 900,000 600,000 Consumer Division $500,000 350,000 150,000 180,000 $ (30,000) Total Sales $2,000,000 Cost of goods sold Gross profit Selling & administrative expenses 1,250,000 750,000 430,000 $ 320,000 250,000 Net income $ 350,000 In the Consumer Division, 70% of the cost of goods sold are variable costs and 35% of selling and administrative expenses are variable costs. The management of the company feels it can save $45,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Consumer Division. Instructions (a) Determine whether the company should discontinue operating the Consumer Division. (b) If the company had discontinued the division for 2016, determine what net income would have been.
KEEP OR DISCONTINUE OPERATION PROBLEM 4 Trump Forest Corporation operates two divisions, the Timber Division and the Consumer Division. The Timber Division manufactures and sells logs to paper manufacturers. The Consumer Division operates retail lumber mills which sell a variety of products in the do-it-yourself homeowner market. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2016 are presented below: Timber Division $1,500,000 900,000 600,000 Consumer Division $500,000 350,000 150,000 180,000 $ (30,000) Total Sales $2,000,000 Cost of goods sold Gross profit Selling & administrative expenses 1,250,000 750,000 430,000 $ 320,000 250,000 Net income $ 350,000 In the Consumer Division, 70% of the cost of goods sold are variable costs and 35% of selling and administrative expenses are variable costs. The management of the company feels it can save $45,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Consumer Division. Instructions (a) Determine whether the company should discontinue operating the Consumer Division. (b) If the company had discontinued the division for 2016, determine what net income would have been.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:KEEP OR DISCONTINUE OPERATION PROBLEM 4
Trump Forest Corporation operates two divisions, the Timber Division and the Consumer Division. The
Timber Division manufactures and sells logs to paper manufacturers. The Consumer Division operates
retail lumber mills which sell a variety of products in the do-it-yourself homeowner market. The company
is considering disposing of the Consumer Division since it has been consistently unprofitable for a number
of years. The income statements for the two divisions for the year ended December 31, 2016 are
presented below:
Timber Division
$1,500,000
900,000
600,000
Consumer Division
$500,000
350,000
150,000
180,000
$ (30,000)
Total
Sales
$2,000,000
Cost of goods sold
Gross profit
Selling & administrative expenses
1,250,000
750,000
430,000
$ 320,000
250,000
Net income
$ 350,000
In the Consumer Division, 70% of the cost of goods sold are variable costs and 35% of selling and
administrative expenses are variable costs. The management of the company feels it can save $45,000 of
fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Consumer
Division.
Instructions
(a)
Determine whether the company should discontinue operating the Consumer Division.
(b)
If the company had discontinued the division for 2016, determine what net income would have
been.
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