Sunland, Inc. has three divisions: Bud, Wise, and Er. The results of operations for May, 2022 are presented below. Bud Wise Er Total Units sold 7,800 13,000 5,200 26,000 Revenue $182,000 $130,000 $104,000 $416,000 Less variable costs 83,200 67,600 41,600 192,400 Less direct fixed costs 36,400
Sunland, Inc. has three divisions: Bud, Wise, and Er. The results of operations for May, 2022 are presented below. Bud Wise Er Total Units sold 7,800 13,000 5,200 26,000 Revenue $182,000 $130,000 $104,000 $416,000 Less variable costs 83,200 67,600 41,600 192,400 Less direct fixed costs 36,400
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Sunland, Inc. has three divisions: Bud, Wise, and Er. The results of operations for May, 2022 are presented below.
All of the allocated costs will continue even if a division is discontinued. Sunland allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Sunland is concerned that it should be discontinued. Sunland thinks that if the division is closed, that sales at the Bud division will increase by 12% while sales at the Er division will stay the same.
|
Bud
|
Wise
|
Er
|
Total
|
||||||
|---|---|---|---|---|---|---|---|---|---|
|
Units sold
|
7,800
|
13,000
|
5,200
|
26,000
|
|||||
|
Revenue
|
$182,000
|
$130,000
|
$104,000
|
$416,000
|
|||||
|
Less variable costs
|
83,200
|
67,600
|
41,600
|
192,400
|
|||||
|
Less direct fixed costs
|
36,400
|
49,400
|
31,200
|
117,000
|
|||||
|
Less allocated fixed costs
|
15,600
|
26,000
|
10,400
|
52,000
|
|||||
|
Net income
|
$46,800
|
$(13,000)
|
$20,800
|
$54,600
|
All of the allocated costs will continue even if a division is discontinued. Sunland allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Sunland is concerned that it should be discontinued. Sunland thinks that if the division is closed, that sales at the Bud division will increase by 12% while sales at the Er division will stay the same.
(a)
Prepare an analysis showing the effect of discontinuing the Wise division.
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