Multi-Cities Inc All of the Allocated Costs Will Continue Even If a Results

Essay

Multi-Cities Inc. has three divisions: Buck Leonard and Hickory. The results of August 2016 are presented below. $\begin{array}{lcccc}&\text { Buck }&\text {Leonard }&\text {Hickory } & \text { Total }\\ \text { Units sold } & 3,000 & 5,000 & 2,000 & 10,000 \\\text { Revenue } & \$ 70,000 & \$ 50,000 & \$ 40,000 & \$ 160,000 \\ \text { Less variable costs } & 32,000 & 26,000 & 16,000 & 74,000 \\ \text {Less direct fixed costs } & 14,000 & 19,000 & 12,000 & 45,000 \\\text { Less allocated fixed costs } & 6,000 & 10,000 & 4,000 & 20,000 \\\text { Net income } & \$ 18,000 & \$(5,000) & \$ 8,000 & \$ 21,000 \\\end{array}$ All of the allocated costs will continue even if a division is discontinued. Multi-Cities allocates indirect fixed costs based on the number of units to be sold. Since the Leonard division has a net loss Multi-Cities feels that it should be discontinued. Multi-Cities feels if the division is closed that sales at the Buck division will increase by 10% and that sales at the Hickory division will stay the same.
Instructions
(a) Prepare an analysis showing the effect of discontinuing the Leonard division.
(b) Should Multi-Cities close the Leonard division? Briefly indicate why or why not.