Question

Munoz 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	$	4,100,000			$	1,224,000			$	4,600,000
Less: Cost of goods sold
Unit-level manufacturing costs		(2,400,000	)			(888,000	)			(2,680,000	)
Rent on manufacturing facility		(610,000	)			(265,000	)			(600,000	)
Gross margin		1,090,000				71,000				1,320,000
Less: Operating expenses
Unit-level selling and admin. expenses		(192,500	)			(51,240	)			(242,500	)
Division-level fixed selling and admin. expenses		(330,000	)			(75,000	)			(320,000	)
Headquarters facility-level costs		(170,000	)			(170,000	)			(170,000	)
Net income (loss)	$	397,500			$	(225,240	)		$	587,500

Required

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

Based on the preceding information, recommend whether to eliminate Division B. (Negative amounts should be indicated by a minus sign.)

	Contribution to profit (loss) Should Division B be eliminated? Yes

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

Prepare companywide income statements before and after eliminating Division B.

	Companywide Income Statements Keep Division B Eliminate Division B Sales Less: Cost of goods sold Unit-level manufacturing costs Rent on manufacturing facility Gross margin $0 $0 Less: Operating expenses Unit-level selling and admin. expenses Division-level fixed selling and admin. expenses Headquarters facility-level costs Net income (loss) $0 $0

b. During 2017, Division B produced and sold 24,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 36,000 units in 2018?

During 2017, Division B produced and sold 24,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 36,000 units in 2018? (Do not round intermediate calculations.)

	Contribution to profit (loss) Should Division B be eliminated? No

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 36,000 units, determine whether Solomon should accept the opportunity to sublease the facility or continue production at Division B.

Suppose that Munoz could sublease Division B’s manufacturing facility for $425,000, at a production and sales volume of 36,000 units. Calculate the contribution to profit of Division B. (Negative amounts should be indicated by a minus sign.)

	Contribution to profit (loss) Should Division B be eliminated? Yes

Answer 1

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a1.	Division B should be eliminated headquarter level Cost allocated to B will continue to occur even after closure of B, however still contribution to company profit is negative
	Net Income/(Loss)		-225240
	Less:
	Headquarters facility-level costs		170000
	Net Contribution		-55240
a2.	Companywide Income Statements	Keep Division B	Eliminate Division B
	Sales	9924000	8700000
	Less: Cost of goods sold
	Unit-level manufacturing costs	-5968000	-5080000
	Rent on manufacturing facility	-1475000	-1210000
	Gross margin	2481000	2410000
	Less: Operating expenses
	Unit-level selling and admin. expenses	-486240	-435000
	Division-level fixed selling and admin. expenses	-725000	-650000	Fixed Cost, will not be eliminated even if B is closed
	Headquarters facility-level costs	-510000	-510000	Fixed Cost, will not be eliminated even if B is closed
	Net income (loss)	759760	815000
b
	Companywide Income Statements	24000 Units	36000 Units
	Sales	1224000	1836000	1224000/24000*36000
	Less: Cost of goods sold
	Unit-level manufacturing costs	-888000	-1332000	-888000/24000*36000
	Rent on manufacturing facility	-265000	-265000	Fixed Cost
	Gross margin	71000	239000
	Less: Operating expenses
	Unit-level selling and admin. expenses	-51240	-76860	-51240/24000*36000
	Division-level fixed selling and admin. expenses	-75000	-75000	Fixed Cost
	Headquarters facility-level costs			Allocated cost, not be considered for Decision Making
	Contribution to Company Profit	-55240	87140
	Should Division B be eliminated?	NO
c	Solomon should accept the opportunity to sublease the facility
Sub Lease Income 425000 Less: Cost of goods sold Unit-level manufacturing costs No Manufacturing Rent on manufacturing facility -265000 Rent will be paid Gross margin 160000 Less: Operating expenses Unit-level selling and admin. expenses No SnD Division-level fixed selling and admin. expenses No SnD Headquarters facility-level costs Contribution to Company Profit 160000