Question

Before purchasing the new ice cream truck, Cowboy Ice Cream, Inc. (CIC) considered eliminating the Retail Division. This was mainly prompted by Frank’s (W.T. fellow shareholder) concern that the income statements for the divisions for May-September 2017 (when the Retail Division is at full operation) imply that profitability could be improved if the Retail Division were eliminated.

Division	Retail	Wholesale
Sales	$60,000	$160,000
Cost of goods sold	(18,000)	(90,000)
Variable operating expenses required to operate each division	(31,500)	(15,050)
Contribution margin	10,500	54,950
General fixed operating expenses (allocation of general administrative expense)	(12,000)	(12,000)
Net income	$ (1,500)	$ 42,950

Answer 1

Answer:

The retail division should NOT be eliminated because there is an incremental loss of $ 10,500 (i.e. 41,450 (-) 30,950).

Calculation:

Earlier the profit of the company was 42950 + (1500) = $ 41,450. The current position will be as follows:

Division	Retail	Wholesale	Total
Sales	$                -	$ 160,000.00	$ 160,000.00
Cost of goods sold	$                -	$ (90,000.00)	$ (90,000.00)
Variable operating expenses	$                -	$ (15,050.00)	$ (15,050.00)
Contribution margin	$                -	$   54,950.00	$    54,950.00
General fixed operating expenses	$(12,000.00)	$ (12,000.00)	$ (24,000.00)
Net income	$(12,000.00)	$   42,950.00	$    30,950.00

In case of any doubt, please comment.