Question

You are provided the following information about Fescue Corp. Evaluate the decision to eliminate one of its manufacturing segments.

	Without	With
	Disposal	Disposal
Sales	778,145	514,317
Cost of goods sold	486,240	314,366
Gross profit	291,905	199,951
Selling expense	106,424	71,696
General expense	42,118	28,339
Administrative expense	37,164	24,754
Operating income	106,199	75,162
Interest expense	87,168	11,186
Income from continuing operations	19,031	63,976
Loss from discontinued operations		37,186
Net income before tax	19,031	26,790
Income tax expense	4,758	6,698
Net income	14,273	20,093
Assets	747,625	348,226
Equity	268,589	307,385

Answer 1

One manufacturing segments should be eliminated because -

1) with disposal, the net income of the company increase from $ 14,273 to $ 20,093.

2) with disposal, Equity value also increase from $ 268,589 to $ 307,385.

Hence, it is better to eliminate one manufacturing segment and continue with only one segment as it give higher net income which is more beneficial to the company.

Also note that the sale, gross profit and operating income would be lesser after discontinuing one manufacturing segment. But, it the net income which drives the decision whether to continue or discontinue a particular segment.