Problem:
Herman Corporation operates two divisions, the A Division and the B Division. Both divisions manufacture and sell logs to paper manufacturers. The company is considering disposing of the B Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2006 are presented below
Division A Division B Total
Sales 400,000 300,000 700,000
Cost of goods 150,000 200,000 350,000
Gross profit 250,000 100,000 350,000
Sell and Admin 200,000 120,000 320,000
Net Income 50,000 (20,000) 30,000
In the B Division, 80% of cost of goods sold is variable costs and 20% of selling and administrative expenses are variable costs. The management of the company feels it can save $30,000 of fixed cost of goods sold and $30,000 of fixed selling expenses if it discontinues operation of the B Division.
Instructions:
1. Determine whether the company should discontinue operating the B Division.
2. If the company had discontinued the division for 2006, determine what net income or would have been reported.