King Company Has Two Divisions Whose Most Recent Financial Statements

question 73

Essay

King Company has two divisions whose most recent financial statements are shown below:
$\begin{array}{|l|c|c|}\hline& \text { Commercial }&\text { Residential }\\\hline& \text { Division }&\text { Division }\\\hline \text { Unit sales}&5,000&1,000\\\hline \text { Sales}&\$400,000&\$100,000\\\hline \text { Less: cost of goods sold:}&\\\hline \text { Unit-level production costs } & 175,000 & 60,000 \\\hline \text { Depreciation, production equipment } & 75,000 & 25,000 \\\hline \text { Gross margin } & \$ 150,000 & \$ 15,000 \\\hline \text { Less: operating expenses: }\\\hline \text { Unit-level selling and admiristrative } & 40,000 & 10,000 \\\hline \text { Corporate-level facility costs (fixed) } & 12,500 & 7,500 \\\hline \text { Net income (loss) } &\$ 97,500 &\$ (2,500) \\\hline\end{array}$
Required:
1) Compute the impact on profit if the Residential Division is eliminated.2) Do you recommend that King eliminate the Residential Division?

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Definitions:

Long Service Leave

An employee benefit that provides paid leave for long-term service, specific to certain countries like Australia.

Income Tax Expense

The total amount of income tax a company is obligated to pay, determined by applying the applicable tax rate to the taxable income for a period.

Tax Rate Change

An adjustment to the rate at which earnings or transactions are taxed, imposed by governmental taxing authorities.

Deferred Tax Assets

The amounts of income taxes recoverable in future periods in respect of deductible temporary differences, carryforward of unused tax losses, and carryforward of unused tax credits.