Question

Below is a table that summarizes the net income of the Kouza Company for the current year. (You see total net income company-wide and to the right you see the income of each department.)

Kouza has 4 departments in its facility. The fixed manufacturing cost is rent on the facility. The fixed selling and adminstrative cost is the salary of the sales manager for the company.

Total	Dept. A	Dept. B	Dept. C	Dept. D
Sales	1,475,000	300,000	475,000	320,000	380,000
Variable manufacturing costs	(543,000)	(170,000)	(130,000)	(98,000)	(145,000)
Variable selling and admin. expenses	(267,000)	(30,000)	(50,000)	(120,000)	(67,000)
Contribution margin	665,000	100,000	295,000	102,000	168,000
Fixed manufacturing costs	(225,000)	(40,000)	(80,000)	(30,000)	(75,000)
Fixed selling and administrative expenses	(132,000)	(25,000)	(72,000)	(13,000)	(22,000)
Net income	308,000	35,000	143,000	59,000	71,000

Questions 1 and 2 below are INDEPENDENT situations.

1. Assume sales double next year in every department. What will be the net income of Department A next year?

2. Assume Kouza Company closes Department C at the beginning of next year. What will total net income be for Kouza (the whole company) next year?  

Answer 1

1. Assume sales double next year in every department. the net income of Department A next year will be

	Particulars	Dept. A
1	Sales	6,00,000
2	Less:Variable manufacturing costs	-3,40,000
3	Less:Variable selling and admin. expenses	-60,000
4	Contribution margin(1-2-3)	2,00,000
5	Less:Fixed manufacturing costs	-40000
6	Less:Fixed selling and administrative expenses	-25000
7	Net income	1,35,000

Note: If the sales are double then all sales and Variable costs will be doubled except fixed cost

2. Assume Kouza Company closes Department C at the beginning of next year. What will total net income be for Kouza (the whole company) next year?

Ans:

If the Department C is closes then Two effects will be happen,

One is Net Income get decreases from the total Income as Net Income of Department C is not added to total Income

Second is Fixed cost allocated to Department C , on the basis of Rent , Will get distributed to remaining three Departments on basis of rent which result in Increase Expenses on every remaining Departments

I.e Net Income will be =$308,000-$102,000=$206,000

Note:102,000=Profit of C + Fixed cost of C.