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Cost savings minus loss of revenues
$ (23,200)
$ 12,150
Division A should not be shut down because loss of revenues if Division A is shut down exceeds
cost savings by $23,200. Division B should be shut down because cost savings from shutting
down Division B exceeds loss of revenues by $12,150.
3. Before deciding to close Division B, management should consider the role that the
Division’s product line plays relative to other product lines. For instance, if the product
manufactured by Division B attracts customers to the company, then dropping Division B may
have a detrimental effect on the revenues of the remaining divisions. Management may also
want to consider the impact on the morale of the remaining employees if Division B is closed.
Talented employees may become fearful of losing their jobs and seek employment elsewhere.
11-42 (30 min.) Dropping a product line, selling more tours
Mechum River Anglers, a division of Old Dominion Travel, offers two types of guided fly fishing
tours, Basic and Deluxe. Operating income for each tour type in 2014 is as follows:
The equipment has a zero disposal value. Guide wages, supplies, and vehicle fuel are variable
costs with respect to the number of tours. Administrative salaries are fixed costs with respect to
the number of tours. Brad Barrett, Mechum River Anglers’ president, is concerned about the losses
incurred on the deluxe tours. He is considering dropping the deluxe tour and offering only the basic
tour.
Required:
