Trump Forest Corporation operates two divisions, the Timber Division and the Consumer Division. The Timber Division manufactures and sells logs to paper manufacturers. The Consumer Division operates retail lumber mills which sell a variety of products in the do-it-yourself homeowner market. The company is considering disposing of the Consumer 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, 2010 are presented below: Timber Division Consumer Division Total
Sales $1,500,000 $500,000 $2,000,000
Cost of goods sold 900,000 450,000 1,350,000
Gross profit 600,000 50,000 650,000
Selling & administrative expenses 250,000 200,000 450,000
Net income $ 350,000 $ (150,000) $ 200,000
In the Consumer Division, 70% 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 $45,000 of fixed cost of goods sold and $60,000 of fixed selling expenses if it discontinues operation of the Consumer Division.
Instructions
(a) Determine whether the company should discontinue operating the Consumer Division.
(b) If the company had discontinued the division for 2010, determine what net income would have been.