dropping a product line selling more units the northern 269412

Dropping a product line, selling more units. The Northern Division of Grossman Corporation makes and sells tables and beds. The following estimated revenue and cost information from the division’s activity based costing system is available for 2008.



Additional information includes:

a. On January 1, 2008, the equipment has a book value of $100,000 and zero disposal value. Any equipment not used will remain idle.

b. Fixed marketing and distribution costs of a product line can be avoided if the line is discontinued.

c. Fixed general administration costs of the division and corporate office costs will not change if sales of individual product lines are increased or decreased or if product lines are added or dropped.

1. On the basis of financial considerations alone, should the Northern Division discontinue the tables product line, assuming the released facilities remain idle? Show your calculations.

2. What would be the effect on Northern Division’s operating income if it were to sell 4,000 more tables? Assume that to do so the division would have to acquire additional equipment costing $42,000 with a one year useful life and zero terminal disposal value. Assume further that the fixed marketing and distribution costs would not change but that the number of shipments would double Show your calculations.

3. Given the Northern Division’s expected operating loss of$1 10,000, should Grossman Corporation shut it down? Assume that shutting down the Northern Division will have no effect on corporate office costs but will lead to savings of all general administration costs of the division. Show your calculations.

4. Suppose Grossman Corporation has the opportunity to open another division, the Southern Division whose revenues and costs are expected to be identical to the Northern Division’s revenues and costs (including a cost of $100,000 to acquire equipment with a one year useful life and zero terminal disposal value). Opening the new division will have no effect on corporate office costs. Should Grossman open the Southern Division? Show yourcalculations.