King Company Has Two Divisions Whose Most Recent Financial Statements

Essay

King Company has two divisions whose most recent financial statements are shown below:
$\begin{array}{lrr}&\text { Commercial } & \text { Residential } \\&\text { Division } & \text { Division }\\\text { Unit sales } & 5,000 & 1,000\\\text { Sales } & \$ 400,000 & \$ 100,000\\\text { Less: cost of goods sold: } &\\\text { Unit-level production costs } & 175,000& 60,000 \\\text { Depreciation, production equipment } & \underline{75,000 }& \underline{ 25,000} \\\text { Gross margin } & \$ 150,000 & \$ 15,000\\\text { Less: operating expenses: } & \\\text { Unit-level selling and administrative } &40,000 & 10,000 \\\text { Corporate-level facility costs (fixed) } & \underline{12,500 }& \underline{7,500}\\\text { Net income (loss) } & \underline{\$ 97,500 }& \underline{ \$(2,500)}\end{array}$ Required:
1)Compute the impact on profit if the Residential Division is eliminated.
2)Do you recommend that King eliminate the Residential Division?