Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2016 are prese
Milwaukee, Inc. has three divisions: Bud, Wise, and Er. The results of May, 2016 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 allocates 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. Milwaukee feels 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.