Question

7. (10 points) J.M Smucker Company operates two divisions, the Fruit Preserves Division and the Snack Foods Division. The Fruit Preserves Division manufactures and sells jelly and jams to supermarkets. The Snack Foods Division sells its products to theme parks. The company is considering disposing of the Snack Foods Division since it has been consistently unprofitable for a number of years. The income statements for the two divisions for the year ended December 31, 2017 are presented below: Fruit Preserve:s Snack Foods Division Total $2,000,000 000. 750,000 430,000 $1,500,000 900,000 600,000 250,000 Sales revenue $500,000 350,000 150,000 Cost of goods sold Gross profit Selling & admin expenses Net income 20.000 In the Snack Fo ds Division, 60% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs. The management of the company feels it can save $60,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinues operation of the Snack Foods Division. Instructions (a) Determine whether the company should discontinue operating the Snack Foods Division. Prepare a schedule which supports your decision. (b) If the company had discontinued the division for 2017, determine what net income would have been 23456789 1 2 3 4 5 6 7 8 9 0 1 2 3

Answer 1

a. In Snacks Food Division :

In case the company shuts the Snacks Food Division :

The cost which will be incurred are as follows :

Fixed Portion of Cost of Goods Sold = $350,000 * 40% - $60,000 = $80,000

Fixed Portion of Selling & admin expenses = $180,000 * 75% - $50,000 = $85,000

Total cost = $165,000

So here we can see that if the company shuts the Snacks food division, it will have loss of $165,000 from that division (as computed above) and if it runs the division, it has loss of only $30,000. Hence, the company should not discontinue operations of the Snacks Food Division.

b.

If company had discontinued the Snacks foods Division
	Fruits Preserves Division	Snacks foods Division	Total
Sales Revenue	$       1,500,000	$ -	$ 1,500,000
Cost of Goods Sold	$          900,000	$          80,000	$     980,000
Gross Profit	$          600,000	$ -80,000	$     520,000
Selling & admin expenses	$          250,000	$          85,000	$     335,000
Net Income	$          350,000	$      -165,000	$     185,000