Using the worksheet below, determine which revenues and costs are probably differential for the decision to discontinue City Division's operations. Betty's Fashions, City Division Divisional Income Statement Differential Revenues and Costs For the Year Ending January 31 Sales revenue $ 6,100,000 Costs Advertising - City division 193,000 Cost of goods sold 3,950,000| 308,000 598,000 753,000 Divisional administrative salaries Selling costs (sales commissions) Rent Share of corporate administration Total costs $ 5,802,000 Net differential gain before income tax expense 298,000 Tax expense at 40% rate (119,200) Net differential gain from store 2$ 178,800 BETTY'S FASHIONS, CITY DIVISION Divisional Income Statement For the Year Ending January 31 Sales revenue $ 6,100,000 Costs Advertising-City Division Cost of goods sold Divisional administrative salaries Selling costs (sales commissions) 193,000 3,950,000 308,000 598,000 753,000 493,000 $ 6,295,00e $ Rent Share of corporate administration Total costs Net loss before income tax benefit (195,000) 78,000 Tax benefit at 40% rate Net loss 24 (117,000) Required: a. Using the worksheet below, determine which revenues and costs are probably differential for the decision to discontinue City Division's operations. b. What will be the effect on Betty's profits if the division is eliminated?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.

Using the worksheet below, determine which revenues and costs are probably differential for the decision to discontinue City
Division's operations.
Betty's Fashions, City Division
Divisional Income Statement
Differential Revenues and Costs
For the Year Ending January 31
Sales revenue
$
6,100,000
Costs
Advertising - City division
193,000
Cost of goods sold
3,950,000|
308,000
598,000
753,000
Divisional administrative salaries
Selling costs (sales commissions)
Rent
Share of corporate administration
Total costs
$
5,802,000
Net differential gain before income tax expense
298,000
Tax expense at 40% rate
(119,200)
Net differential gain from store
2$
178,800

BETTY'S FASHIONS, CITY DIVISION
Divisional Income Statement
For the Year Ending January 31
Sales revenue
$ 6,100,000
Costs
Advertising-City Division
Cost of goods sold
Divisional administrative salaries
Selling costs (sales commissions)
193,000
3,950,000
308,000
598,000
753,000
493,000
$ 6,295,00e
$
Rent
Share of corporate administration
Total costs
Net loss before income tax benefit
(195,000)
78,000
Tax benefit at 40% rate
Net loss
24
(117,000)
Required:
a. Using the worksheet below, determine which revenues and costs are probably differential for the decision to discontinue City
Division's operations.
b. What will be the effect on Betty's profits if the division is eliminated?

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