Mississippi Forest Corporation Operates Two Divisions the Commercial Division and the Consumer

Essay

Mississippi Forest Corporation operates two divisions the Commercial Division and the Consumer Division. The Commercial 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 2014 are presented below: $\begin{array}{lr}&\text { Commercial}&\text { Consumer}&\text { Total}\\\text { Sales revenue } & \$ 1,500,000 &\$500,000&\$2,000,000\\\text { Cost of goods sold } & 900,000 &350,000&1,250,000\\ \text { Gross profit } & 600,000&150,000&750,000 \\\text { Selling } \& \text { administrative expenses } & 250,000 &180,000&430,000\\\text { Net income } & \$ 350,000&\$(30,000)&\$320,000 \\\end{array}$ In the Consumer Division 70% of cost of goods sold are variable costs and 35% of selling and administrative expenses are variable costs. The management of the company feels it can save $45000 of fixed cost of goods sold and $42000 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 2014 determine what net income would have been.