Closing down any division would result in saving of 60 percent of the fixed cost
ID: 2453771 • Letter: C
Question
Closing down any division would result in saving of 60 percent of the fixed costs of that division . Top management is very concerned about the unprofitable divisions ( A and B) and is considering closing them for the year
Sales A 650,000 B 420000 C 900000 D 700,000
cost of goods 490,000 340000 560000 450000
seling general , and administrative expenses 160,000 90000 225000 235000
operating income/loss (25000) (10000) 115000 15000
cost of goods sold 86 percent 92 percent 85 percent 76 percent
selling ,general, and aministrative expenses 63 percent 76 percent 70 percent 65 percent
Calculate the increase or decrease in operating income if partyka closing A
Calculate the increase or decrease in operating income if partyka closes B
What other factors should the top management of partyka consider before making a decision
Explanation / Answer
1 ) operating income if Division A is closed = contribution - Fixed cost
= 0 - 160000 (1 -.60)
=0 - 160000*.40
= 0- 64000
= - 64000 (loss)
Increase / (decrease) = 25000 -64000 = 39000 (increase in loss so operating loss will increased by $ 39000 ]
b) Operating income if division B is closed = 0 - 90000 (1- .60)
= 0- 90000*.40
= - 36000 (loss)
Operating loss will increase by 10000 -36000 = -26000 loss
c)The management should consider the contribution generated by loss making division .Because in case any division is closed ,there will be no contribution but there will be 40% fixed cost that will continue to be incurred .
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