Question

Blossom, 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 revenue		$127,800			$340,300		$543,900
Variable expenses		57,300			190,200		307,400
Contribution margin		70,500			150,100		236,500
Direct expenses		35,400			70,900		113,700
Allocated expenses		58,000			58,000		58,000
Operating income		$(22,900	)		$21,200		$64,800

Based on the way allocated expenses are divided among the divisions, what do you think will happen to the Average division if the company continues to prepare financial statements in this way, assuming Weak was dropped?

If Weak is dropped, then $ will be allocated to Average, resulting in a $ lossprofit for the division as currently reported

Answer 1

Financial analysis if weak is dropped
	Average	Strong
Sales revenue	340,300	543,900
Variable expenses	190,200	307,400
Contribution margin	150,100	236,500
Direct expenses	70,900	113,700
Allocated expenses	87,000	87,000
Operating income	(7,800)	35,800
Final Answer:
If Weak is dropped, then $87000 will be allocated to Average, resulting in a $7800 loss for the division as currently reported