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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:
- Calculate the increase or decrease in operating income if Modern Company closes division B using the below table:
- What factors should the top management of Modern Company consider before making a decision.
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