Problem:
Scoff Division of World-Wide Paint currently is losing money; therefore senior management is considering selling or closing it. Scoff's only product an intermediate chemical called Binder is used principally by the firm's Latex Division. If Scoff is sold, Latex Division can purchase ample quantities of Binder in the market at sufficiently high quality levels to meet it's requirements. World wide requires all of it divisions to supply product to other World-Wide divisions before servicing the external market.
Scoff's statement of operations for the last quarter follows:
SCOFF DIVISION
Profit/Loss Last Quarter
($thousands)
Revenues
Inside 200
Outside 75 275
Operating Expenses
Variable costs 260
Fixed costs 15
Allocated corporate overhead 40 315
Net income (loss)before taxes ($40)
Problem 1. Worldwide paint has the policy of transferring all products internally at variable cost. In scoffs case variable cost is 80% of the market price.
Problem 2. All of Scoff's case fixed costs are avoidable cash flows if it is closed or sold.
Problem 3. Of the allocated corporate overhead 10% is caused by the presence of scoff and will be avoided if scoff is closed or sold.
Should the Scoff Division be closed?