Green Forest Berhad

QUESTION 1
Green Forest Berhad operates two divisions, the Bedroom Division and the Consumer
Division. The Bedroom Division manufactures and sells bedroom fixture and fittings. The
Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself homeowner market. The company is considering disposing of the Consumer
Division since it has been consistently unprofitable for a number of years. The income
statements for the two divisions for the year ended December 31, 2010 are presented
below:

Bedroom Division
Sales

Consumer Division

Total

$1,500,000

$500,000

$2,000,000

Cost of goods sold

900,000

350,000

1,250,000

Gross profit

600,000

150,000

750,000

Selling & administrative expenses

250,000

180,000

430,000

$ 350,000

$(30,000)

$ 320,000

Net income

In the Consumer Division, 70% of the cost of goods sold are variable costs and 30% of
selling and administrative expenses are variable costs. The management of the company
feels it can save $60,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if
it discontinues operation of the Consumer Division.

Instructions:
a)

Determine whether the company should discontinue operating the Consumer Division.

b)

If the company had discontinued the division for 2010, determine what net income
would have been.

c)

Identify the advantages to Green Forest Berhad if it decided to continue operating
Consumer Division.