Problem: Anheiser has three divisions: bud, wise, and Er. The results of May, 2006 are presented below:
Bud Wise Er Total
Units sold 3,000 5,000 2,000 10,000
Revenue $70,000 $50,000 $40,000 $160,000
Less variable costs 32,000 26,000 16,000 74,000
Less direct fixed costs 14,000 19,000 12,000 45,000
Less allocated fixed costs 6,000 10,000 4,000 20,000
Net income $18,000 ($5,000) $8,000 $21,000
All of the allocated costs will continue even if a division is discontinued. Anheiser allocated indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Anheiser feels that it should be discontinued. Anheiser feels if the division is closed, that sales at the Bud division will increase by 20%, and that sales at the Er division will stay the same.
Instructions:
A. Prepare an analysis showing the effect of discontinuing the Wise division.
B. Should Anheiser close the Wise division? Briefly indicate why or why not.