Question

Rooney Manufacturing Co. produces and sells specialized equipment used in the petroleum industry. The company is organized into three separate operating branches: Division A, which manufactures and sells heavy equipment; Division B, which manufactures and sells hand tools; and Division C, which makes and sells electric motors. Each division is housed in a separate manufacturing facility. Company headquarters is located in a separate building. In recent years, Division B has been operating at a net loss and is expected to continue to do so. Income statements for the three divisions for 2017 follow.

	Division A				Division B				Division C
Sales	$	4,300,000			$	1,219,000			$	4,400,000
Less: Cost of goods sold
Unit-level manufacturing costs		(2,500,000	)			(851,000	)			(2,580,000	)
Rent on manufacturing facility		(710,000	)			(280,000	)			(500,000	)
Gross margin		1,090,000				88,000				1,320,000
Less: Operating expenses
Unit-level selling and admin. expenses		(194,000	)			(65,435	)			(244,000	)
Division-level fixed selling and admin. expenses		(340,000	)			(78,000	)			(323,000	)
Headquarters facility-level costs		(200,000	)			(200,000	)			(200,000	)
Net income (loss)	$	356,000			$	(255,435	)		$	553,000

Required

1. a-1. Based on the preceding information, recommend whether to eliminate Division B.

2. a-2. Prepare companywide income statements before and after eliminating Division B.

3. b. During 2017, Division B produced and sold 23,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 32,000 units in 2018?

4. c. Suppose that Solomon could sublease Division B's manufacturing facility for $425,000.  Assuming that Division B currently has a production and sales volume of 32,000 units, determine whether Solomon should accept the opportunity to sublease the facility or continue production at Division B.

Answer 1