ACCOUNTING
1-18 Cost Data for Managerial Purposes
Beige Corporation operates retail stores in both downtown (city) and Suburban (Mall) locations. The company has two responsibility centers; the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Beige’s CEO is concern about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.
Beige Computers, City Division
Divisional Income Statement
For the Year Ending January 31
Sales revenue ………………………………………………………………. $12,900,000
Costs
Advertising – City Division ………………………………………… 525,000
Cost of goods sold ………………………………………………… 6,450,000
Divisional administrative salaries ……………………………… 870,000
Selling costs (sales commissions) ……………………………… 1,730,000
Rent …………………………………………………………………………. 2,215,000
Share of corporate administration ……………………….. 1,425,000
Total costs ……………………………………………………………. $13,215,000
Net loss before income tax benefit …………………… $(315,000)
Tax benefit at 40% rate …………………………………………… 126,200
Net loss …………………………………………………………….. $189,000
Required
What revenues and costs are probably differential for the decision to discontinue City division’s operations? What will be the effect on Beige’s profits if the division is eliminated?
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