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# Part V. Exercise - Eliminate Segment (20 pts.) Milwaukee has three divisions: bud, wise, and Er. The results of May, 2013 are presented below:

Do you know if thet is corrct please

Part V. Exercise – Eliminate Segment (20 pts.) Milwaukee has three divisions: bud, wise, and Er. The results of May, 2013 are presented below: Bud Wise Er Total Units sold 3,000 5,000 2,000 10,000 Revenue \$70,000 \$50,000 \$40,000 \$160,000 Less variable costs 32,000 26,000 16,000 74,000 Less direct fixed costs 14,000 19,000 12,000 45,000 Less allocated fixed costs 6,000 10,000 4,000 20,000 Net income \$18,000 \$ (5,000 ) \$ 8,000 \$ 21,000 All of the allocated costs will continue even if a division is discontinued. Milwaukee allocated indirect fixed costs based on the number of units to be sold. Since the Wise division has a net loss, Milwaukee feels that it should be discontinued. Milwaukeefeels if the division is closed, that sales at the Bud division will increase by 12%, and that sales at the Er division will stay the same. Instructions A. Prepare an analysis showing the effect of discontinuing the Wise division. If the Wise division is closed the effects are 1. Loss of revenue of Wise Division (50,000) 2. Savings in variable and direct fixed cost of Wise division 45,000 3. Increase in contribution margin for Bud division 7,600 Net effect \$2,600 The overall net income would be higher by \$2,600 The allocated costs do not change and so only the direct costs would reduce for Wise division For Bud division, the increase in sales is 70,000 X 12% = 8,400 The increase in variable costs is 32,000 X 12% = 3,840 Increase in contribution margin = 8,400-3,840= 4,560 B. Should Milwaukee close the Wise division? Briefly indicate why or why not. Milwaukee should close the Wise division should the net income would be higher after the closure by \$2,600.

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