Superior Corporation has 2 divisions with the following fina…
Superior Corporation has 2 divisions with the following financial information: Division R Division S Contribution margin $3,200,000 $1,800,000 Operating Costs Administrative salaries 700,000 600,000 Selling salaries 600,000 800,000 Supplies 200,000 210,000 Depreciation of equipment 150,000 200,000 Delivery costs 175,000 60,000 Allocated corporate overhead 200,000 150,000 Total operating costs 2,025,000 2,020,000 Operating income (loss) $1,175,000 -$220,000 There is no resale value on the equipment. The selling salaries, supplies, and delivery costs are avoidable with respect to the sales generated. Required Part A If the Division S is discontinued, all but two administrative positions could be eliminated. Each administrative position is paid $50,000 per year. Assuming no change in Division R’s sales, what effect would dropping Division S have on the company’s operating income? Prepare an incremental analysis to determine the impact on operating income. Based on your analysis conclude on whether the Division S should be discontinued. Part B Refer back to the original data. If Division S is dropped, it is estimated that Division R’s sales would increase by 15%. The president believes that the two administrative positions will still need to be maintained. Each administrative position is paid $50,000 per year. Equipment currently used by Division S would be used by Division R for the extra sales. Should Division S be discontinued? Prepare a total analysis to determine the impact on operating income. Based on your analysis conclude on whether Division S should be discontinued. Part C Explain the most significant non-financial (qualitative) factor that needs to be considered in the keep or drop decision related to Division S.
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