Saturday, 29 November 2014

Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations.

Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.

BETTY'S FASHIONS, CITY DIVISION
Divisional Income Statement
For the Year Ending January 31
  Sales revenue $ 4,500,000  
  Costs      
    Advertising—City Division   177,000  
    Cost of goods sold   2,350,000  
    Divisional administrative salaries   292,000  
    Selling costs (sales commissions)   582,000  
    Rent   737,000  
    Share of corporate administration   477,000  
 


  Total costs $ 4,615,000  
 


  Net loss before income tax benefit $ -115,000  
  Tax benefit at 40% rate   46,000  
 


  Net loss $ -69,000  
 







Required:
What revenues and costs are probably differential for the decision to discontinue City division's operations?

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