2C2O THE FURNITURE COMPANY CURRENTLY HAS THREE DIVISIONS
257.
CSO: 2C2f
LOS: 2C2o
The Furniture Company currently has three divisions: Maple, Oak, and Cherry. The oak
furniture line does not seem to be doing well and the president of the company is
considering dropping this line. If it is dropped, the revenues associated with the Oak
Division will be lost and the related variable costs saved. Also, 50% of the fixed costs
allocated to the oak furniture line would be eliminated. The income statements, by
divisions, are as follows.
Maple
Oak
Cherry
Sales
$55,000
$85,000
$100,000
Variable Costs
40,000
72,000
82,000
Contribution Margin
15,000
13,000
18,000
Fixed costs
10,000
14,000
10,200
Operating profit (loss)
$ 5,000
$(1,000)
$ 7,800
Which one of the following options should be recommended to the president of the
company?
a.
Continue operating the Oak Division as discontinuance would result in a total
operating loss of $1,200.
b.
Continue operating the Oak Division as discontinuance would result in a $6,000
decline in operating profits.
c.
Discontinue the Oak Division which would result in a $1,000 increase in
operating profits.
d.
Discontinue the Oak Division which would result in a $7,000 increase in