The Usery Company is considering discontinuing Department B, one of the three departments it currently maintains. The following information has been gathered for the three depart ments:
(000 omitted)
|
Dept. A |
Dept. b |
Dept. C |
|
|
Sales |
$60,000 |
$50,000 |
$80,000 |
|
Cost of goods sold |
$40,000 |
$42,000 |
$60,000 |
|
Operating expenses: |
|||
|
Salaries |
8,000 |
6,400 |
12,000 |
|
Rent |
2,000 |
2,000 |
3,000 |
|
Utilities |
1,000 |
2,700 |
2,000 |
|
Total costs |
$51,000 |
$53,100 |
$77,000 |
|
Net income |
$ 9,000 |
$(3,100) |
$3,000 |
If Department B is eliminated, the space it occupies will be divided equally among
Departments A and C. Utilities are allocated on the basis of floor space occupied. 70 percent
of the salaries in Department B would be eliminated; the other 30 percent would be split
equally between Departments A and C.
1. Prepare a combined income statement for Departments A and C on the assumption that
Department B is dropped.
2. Based on your analysis in question 1, should Department B be eliminated?
3. What qualitative factors should the Usery Company consider in making the decision as to
whether or not Department B should be discontinued?