xercise 8-18 (Part Level Submission) (a) LINK TO TEXT xercise 8-18 (Part Level S

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xercise 8-18 (Part Level Submission)

(a)

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xercise 8-18 (Part Level Submission)

Physical Phitness, Inc., operates three divisions, Weak, Average, and Strong. As it turns out, the Weak division has the lowest operating income, and the president wants to close it. “Survival of the fittest, I say!” was his response when the Weak division’s manager insisted that his division earned money for the company. Following is the most recent financial analysis for each division:
Weak Average Strong Sales $126,500 $342,600 $526,200 Variable expenses 52,400 197,100 307,100 Contribution margin 74,100 145,500 219,100 Direct expenses 30,300 76,800 113,300 Allocated expenses 56,200 56,200 56,200 Operating income $(12,400 ) $12,500 $49,600

Explanation / Answer

Weak Division should not be closed. It is the strongest of all the three divisions. The Profit / Volume Ratio for division Weak is by far the highest at 34.62 %. Weak is therefore the most profitable division of the company, and hence the management would be well advised not to close it down. Rather, in order to increase the volume of sales, steps should be taken to promote division Weak aggressively, as that would contribute significantly to improve the overall profitability of the company. Also, the management should revisit the allocation basis of allocable expenses.

Weak Average Strong Sales 126,500 342,600 526,200 Variable expenses 52,400 197,100 307,100 Direct expenses 30,300 76,800 113,300 Contribution margin 43,800 68,700 105,800 Allocated expenses 56,200 56,200 56,200 Operating Income (12,400) 12,500 49,600 Profit/ Volume Ratio(Contribution/Sales) 34.62% 20% 20%

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