Simon 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, 2002 are presented below: Timber Division Consumer Division Total Sales P1,500,000 P500,000 P2,000,000 Cost of goods sold 900,000 350,000 1,250.000 Gross profit 600,000 150,000 750,000 Selling & admin expenses 250,000 180,000 430,000 Net income P_350,000 P(30,000) P 320,000 In the Consumer Division, 70% of the cost of goods sold are variable costs and 30% of selling and administrative expenses are variable costs. The management of the company feels it can save P60,000 of fixed cost of goods sold and P50,000 of fixed selling expenses if it discontinues operation of the Consumer Division. Required: 1. Determine the sales revenue that may be forgone when Consumer Division is discontinued. 2. Determine the avoidable costs: a. Manufacturing b. Non-manufacturing 3. Determine the net advantage (disadvantage) of dropping Consumer Division. Activa
Simon 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, 2002 are presented below: Timber Division Consumer Division Total Sales P1,500,000 P500,000 P2,000,000 Cost of goods sold 900,000 350,000 1,250.000 Gross profit 600,000 150,000 750,000 Selling & admin expenses 250,000 180,000 430,000 Net income P_350,000 P(30,000) P 320,000 In the Consumer Division, 70% of the cost of goods sold are variable costs and 30% of selling and administrative expenses are variable costs. The management of the company feels it can save P60,000 of fixed cost of goods sold and P50,000 of fixed selling expenses if it discontinues operation of the Consumer Division. Required: 1. Determine the sales revenue that may be forgone when Consumer Division is discontinued. 2. Determine the avoidable costs: a. Manufacturing b. Non-manufacturing 3. Determine the net advantage (disadvantage) of dropping Consumer Division. Activa
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Simon 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, 2002 are
presented below:
Timber Division
Consumer Division
Total
Sales
P1,500,000 P500,000 P2,000,000
Cost of goods sold
900,000
350.000 1.250.000
Gross profit
Selling & admin expenses
600,000
150,000
750,000
250,000
180,000
430,000
Net income
P 350,000
P(30,000)
P 320,000
In the Consumer Division, 70% of the cost of goods sold are variable costs and 30% of selling and
administrative expenses are variable costs. The management of the company feels it can save P60,000 of
fixed cost of goods sold and P50,000 of fixed selling expenses if it discontinues operation of the
Consumer Division.
Required:
1. Determine the sales revenue that may be forgone when Consumer Division is discontinued.
2. Determine the avoidable costs:
a. Manufacturing
b. Non-manufacturing
3. Determine the net advantage (disadvantage) of dropping Consumer Division.
4. Should Consumer Division be dropped?
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