Modern Company has four divisions. The budgeted revenues and expenses for each division for 2021 follows:
Division
A
B
C
D
Sales
$504,000
$948,000
$960,000
$1,240,000
Cost of goods sold
440,000
930,000
765,000
925,000
Selling & admin costs
96,000
202,500
144,000
210,000
Operating income (loss)
$(32,000)
$(184,500)
$51,000
$105,000
Further analysis of costs reveals the following percentages of variable costs in each division:
A
B
C
D
Cost of goods sold
90%
80%
90%
85%
Selling & admin costs
50%
50%
60%
60%
Closing down any division would result in a savings of 40% of the fixed costs of that division.
Required:
1. Calculate the increase or decrease in operating income if Modern Company closes division B using the below table:
Item
2. What factors should the top management of Modern Company consider before making a decision.