Question

Benson 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 2016 follow.

Division A Division B Division CSales$3,500,000  $1,104,000  $4,100,000 Less: Cost of goods sold           Unit-level manufacturing costs (2,100,000)  (782,000)  (2,580,000)Rent on manufacturing facility (510,000)  (255,000)  (400,000)Gross margin 890,000   67,000   1,120,000 Less: Operating expenses           Unit-level selling and admin. expenses (189,000)  (50,025)  (239,000)Division-level fixed selling and admin. expenses (280,000)  (68,000)  (313,000)Headquarters facility-level costs (180,000)  (180,000)  (180,000)Net income (loss)$241,000  $(231,025) $388,000

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 23,000 units of hand tools. Calculate the contribution to profit if sales and production increase to 33,000 units in 2018?

c. Suppose that Benson could sublease Division B’s manufacturing facility for $460,000, at a production and sales volume of 33,000 units, Calculate the contribution to profit of Division B.

Answer 1