Beige Computers operates retail stores in both downtown (City) and suburban (Mall) location ns. 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 concerned 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 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.................... 525,000
Advertising-City Division 6,450,000
Cost of Goods Sold 870,000
Divisional administrative salaries 1,730,000
Selling costs (sales commissions) 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 operations?
- What will be the effect on Beige's profits if the division is eliminated?