Question: Closing down divisions. Ainsley Corporation has four operating divisions. The budgeted revenues and expenses for each division for 2017 follows:
Further analysis of costs reveals the following percentages of variable costs in each division: Cost of goods sold 90% 80% 90% 85% Selling, general, and administrative expenses 50% 50% 60% 60% Closing down any division would result in savings of 40% of the fixed costs of that division. Top management is very concerned about the unprofitable divisions (A and B) and is considering closing them for the year.
1. Calculate the increase or decrease in operating income if Ainsley closes division A.
2. Calculate the increase or decrease in operating income if Ainsley closes division B.
3. What other factors should the top management of Ainsley consider before making a decision?