Question

Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2013 are presented below

All of the allocated costs will continue even if a division is discontinued. Milwaukee allocates indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Milwaukee feels that it should be discontinued. Milwaukee feels if the division is closed, that sales at the Bud division will increase by 12%, and that sales at the Er division will stay the same.
Instructions
(a) Prepare an analysis showing the effect of discontinuing the Wise division.
(b) Should Milwaukee close the Wise division? Briefly indicate why or why not.

Answer 1

Answer 2

Prepare a statement showing analysis on closing the division as shown below Particulars Bud Total Units sold (Bud = 3,000 x 1 , 12) Er- same 3,3602.0005,360 Revenue (Bud- 3,360 x 70,000/3,000) Er- same Less: variable cost (Bud- 3,360 x 32,000/3,000) Er- same Less: Direct fixed costs 78.40040,000118.400 35.84016,00051.840 14.000 12,000 26.000 Less: Allocation of fixed cost in ratio of revenue 3,360-2,000) Net Income 12.537.31 7.462.6920,000 6.022.69 4.537.31 20.560.00 The reported net income before discontinuing 'wise' division is S21,000. The net income falls by 440, which is (S21,000 - S20,560). Therefore, the division 'wise' should not be discontinued