Beige Computers operates retail stores in both downtown (City) and suburban (Mall) location ns. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Beige's CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent income statement follows. The CEO has asked for your advice on shutting down the City Division's operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes in the operations or costs of the Mall Division.
- Beige Computers, City Division
- Divisional Income Statement
- For the Year Ending January 31
- Sales Revenue..... 12,900,000
- Costs.................... 525,000
- Advertising-City Division 6,450,000
- Cost of Goods Sold 870,000
- Divisional administrative salaries 1,730,000
- Selling costs (sales commissions) 2,215,000
- Share of corporate administration 1,425,000
- Total Costs 13,215,000
- Net loss before income tax benefit (315,000)
- Tax benefit at 40% rate 126,200
- Net Loss 189,000
REQUIRED
What revenues and costs are probably differential for the decision to discontinue City Division operations?What will be the effect on Beige's profits if the division is eliminated?