Question

Vernon 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			$	1,250,000			$	4,400,000
Less: Cost of goods sold
Unit-level manufacturing costs		(2,700,000	)			(900,000	)			(2,980,000	)
Rent on manufacturing facility		(510,000	)			(290,000	)			(300,000	)
Gross margin		1,090,000				60,000				1,120,000
Less: Operating expenses
Unit-level selling and admin. expenses		(196,000	)			(64,125	)			(246,000	)
Division-level fixed selling and admin. expenses		(350,000	)			(82,000	)			(327,000	)
Headquarters facility-level costs		(170,000	)			(170,000	)			(170,000	)
Net income (loss)	$	374,000			$	(256,125	)		$	377,000

Required

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

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

b. During 2017, Division B produced and sold 25,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 36,000 units in 2018?

c. Suppose that Solomon could sublease Division B's manufacturing facility for $415,000.  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.

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

During 2017, Division B produced and sold 25,000 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.)

Suppose that Vernon could sublease Division B’s manufacturing facility for $415,000, 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.)

Answer 1

working
	Division A	Division B	Division C	Total
Sales	$4,300,000	1,250,000	4400000	$9,950,000
Less: Cost of goods sold
Unit-level manufacturing costs	-2700000	-900000	-2980000	($6,580,000)
Rent on manufacturing facility	-510000	-290000	-300000	($1,100,000)
Gross margin	$1,090,000	$60,000	$1,120,000	$2,270,000
Less: Operating expenses
Unit-level selling and admin. expenses	-196000	-64125	-246000	($506,125)
Division-level fixed selling and admin. expenses	-350000	-82000	-327000	($759,000)
Headquarters facility-level costs	-170000	-170000	-170000	($510,000)
Net income (loss)	$374,000	($256,125)	$377,000	$494,875
	If Divison B is eliminated
Answer 1	Division A	Division C	Total
Sales	$4,300,000	4400000	$8,700,000
Less: Cost of goods sold
Unit-level manufacturing costs	-2700000	-2980000	($5,680,000)
Rent on manufacturing facility	-510000	-300000	($810,000)
Gross margin	$1,090,000	$1,120,000	$2,210,000
Less: Operating expenses
Unit-level selling and admin. expenses	-196000	-246000	($442,000)
Division-level fixed selling and admin. expenses	-350000	-327000	($677,000)
Segment margin	$544,000	$547,000	$1,091,000
Headquarters facility-level costs			510000
Net income (loss)			$581,000
Yes, Division B should be eliminated as there will be incraese in income by
(581000-494875)=$86125
answer a2
Before
	Division A	Division B	Division C	Total
Sales	$4,300,000	1,250,000	4400000	$9,950,000
Less: Cost of goods sold
Unit-level manufacturing costs	-2700000	-900000	-2980000	($6,580,000)
Rent on manufacturing facility	-510000	-290000	-300000	($1,100,000)
Gross margin	$1,090,000	$60,000	$1,120,000	$2,270,000
Less: Operating expenses
Unit-level selling and admin. expenses	-196000	-64125	-246000	($506,125)
Division-level fixed selling and admin. expenses	-350000	-82000	-327000	($759,000)
Headquarters facility-level costs	-170000	-170000	-170000	($510,000)
Net income (loss)	$374,000	($256,125)	$377,000	$494,875
After
	If Divison B is eliminated
	Division A	Division C	Total
Sales	$4,300,000	4400000	$8,700,000
Less: Cost of goods sold
Unit-level manufacturing costs	-2700000	-2980000	($5,680,000)
Rent on manufacturing facility	-510000	-300000	($810,000)
Gross margin	$1,090,000	$1,120,000	$2,210,000
Less: Operating expenses
Unit-level selling and admin. expenses	-196000	-246000	($442,000)
Division-level fixed selling and admin. expenses	-350000	-327000	($677,000)
Segment margin	$544,000	$547,000	$1,091,000
Headquarters facility-level costs			510000
Net income (loss)			$581,000
ans b
No. of units is 25000
	Division B	Cost per unit
Sales	1,250,000	50
Less: variable cost
Unit-level manufacturing costs	-900000	-36
Unit-level selling and admin. expenses	-64125	-2.5650
Contribution margin		11.4350
If sales is 36000 than no. of units*cost/revenue per unit
Sales (36000*50)	1800000
Less: variable cost
Unit-level manufacturing costs	-1296000
Unit-level selling and admin. expenses	-92340
Contribution margin	411660
ans c
Yes , Diviison B should be eliminated
Yes , he should accept the opportunity to sublease as contribution margin of $411660
is less than $415000 that he would earn