Words 0 Path p QUESTION 13 Tennessee Inc has three divisions

Words 0 Path: p QUESTION 13 Tennessee, Inc, has three divisions Nash, Memp and Knox. The results of July 31, 2018 are presented below. MempKnox Total 10,000 Units sold Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income 3,000 $71,000 32,000 4,000 5,000 $50,000 26,000 19.000 12.000 $ (7.000) 2.000 $40,000 $161,000 74,000 45,000 16,000 12,000 400920.000 $19.000 S 8.000 All of the allocated costs will continue even if a division is discontinued Tennessee allocates indirect foxed costs based on the number of units to be sold Since the Memp division has a net loss. Tennessee feels that it should be discontinued. Tennessee feels if the division is closed, that sales at the Nash division will increase by 12%, and that sales at the Knox division will stay the same Instructions Present the analysis in a table. (a) Prepare an analysis showing the effect of discontinuing the Memp division (b) Should Tennessee close the Memp division? Briefly indicate why or why not. Click Save and Submit to save and submit. Click Save All Answers to save all answers Save All

Solution

If Menp is closed Nash sales would incraese by 12% so the solution is If memp division is discountinued than Net operating Incoe would be Memp division discontinued Revenue (71000*112%)+40000 119520 Less: Variable cost (32000*112%)+16000 51840 Less: Direct fixed cost (14000+12000) 26000 Less: Allocated Fixed cost 22000 Net Income 19680 Anwer is Memp division discontinued Memp division continued Net Increase or (decrease) in Income Revenue   119520 161000 -41480 Less: Variable cost 51840 74000 -22160 Less: Direct fixed cost ( 26000 45000 -19000 Less: Allocated Fixed cost 22000 22000 0 Net Income 19680 20000 -320 Ans b No memp division should not be closed as there is net decraese in profit by $320. The Memp division is earning contribution margin of (50000-26000)= $24000 out of this it is able to provide for direct fixed expenses and also a part of allocated fixed expenses so it is not advisable to discountinue. As the allocated fixed expenses will be incurred wheather Memp is continued or not