QUESTION - Green Forest Berhad operates two divisions, the Bedroom Division and the Consumer Division. The Bedroom Division manufactures and sells bedroom fixture and fittings. The Consumer Division operates retail lumber mills which sell a variety of products in the do-it yourself homeowner market. The company is considering disposing of the Consumer 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, 2010 are presented below:
|
|
Bedroom Division
|
Consumer Division
|
Total
|
|
Sales
|
$1,500,000
|
$500,000
|
$2,000,000
|
|
Cost of goods sold
|
900,000
|
350,000
|
1,250,000
|
|
Gross profit
|
600,000
|
150,000
|
750,000
|
|
Selling & administrative expenses
|
250,000
|
180,000
|
430,000
|
|
Net income
|
$350,000
|
$(30,000)
|
$320,000
|
In the Consumer Division, 70% of the cost of goods sold are variable costs and 30% of selling and administrative expenses are variable costs. The management of the company feels it can save $60,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Consumer Division.
Instructions:
a) Determine whether the company should discontinue operating the Consumer Division.
b) If the company had discontinued the division for 2010, determine what net income would have been.
c) Identify the advantages to Green Forest Berhad if it decided to continue operating Consumer Division.