Question

Betty’s Fashions operates retail stores in both downtown and suburban 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. Betty’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 City Division 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.

BETTY'S FASHIONS, CITY DIVISION Divisional Income Statement For the Year Ending January 31
Sales revenue	$	4,500,000
Costs
Advertising—City Division		177,000
Cost of goods sold		2,350,000
Divisional administrative salaries		292,000
Selling costs (sales commissions)		582,000
Rent		737,000
Share of corporate administration		477,000
Total costs	$	4,615,000
Net loss before income tax benefit	$	(115,000	)
Tax benefit at 40% rate		46,000
Net loss	$	(69,000	)

Required:

1. Using the worksheet below, determine which revenues and costs are probably differential for the decision to discontinue City Division's operations.
2. What will be the effect on Betty’s profits if the division is eliminated?

Using the worksheet below, determine which revenues and costs are probably differential for the decision to discontinue City Division's operations.

Required A Required B Using the worksheet below, determine which revenues and costs are probably differential for the decision to discontinue City Division's operations. Betty's Fashions, City Division Divisional Income Statement Differential Revenues and Costs For the Year Ending January 31 Sales revenue Costs Advertising - City division Cost of goods sold Divisional administrative salaries Selling costs (sales commissions) Rent Share of corporate administration Total costs

Answer 1

Answer is given below

Betty's Fashions, City Division Divisional Income Statement Differential Revenues and costs For the year Ending January 31 Sales Revenue $4,500,000 Differential and relevant Costs: Advertising - City Division $177,000 Differential and relevant Cost of goods sold $2,350,000 Differential and relevant Divisional administration salaries $292,000 Differential and relevant Selling costs (selling commission) $582,000 Differential and relevant Rent $737,000 Differential and relevant Share of Corporate administration $0 Non relevant Total costs $4,138,000 Profit before income tax $362,000 Tax at 40% $144,800 Profit after tax $217,200 Explanation: Only relevant differential cost be considered for above calculation Relevant costs are those costs which are associated directly with division Common expenses allocated are non relevant for the analysis b) Betty's profit will decrease by $217,200