DIVISION I : SALES, VAR COSTS AND FIXED COSTS ARE 4,000, 1000 AND 1800, RESPECTIVELY DIVISION...

DIVISION I : SALES, VAR COSTS AND FIXED COSTS ARE 4,000, 1000 AND 1800, RESPECTIVELY

DIVISION II: THE NUMBERS ARE 5,000, 3,000 AND 2800, RESPECTIVELY

DIVISION III : THE NUMBERS ARE 6,000, 1200 AND 1400 , RESPECTIVELY

CASE A: IF WE DUMP DIV II, THE FIXED COSTS WILL REMAIN IN FULL

CASE B: IF WE DUMP IT, THE FIXES COSTS WILL BE TOTALLY ELIMINATED

CASE C: IF WE DUMP IT, 50% WILL BE ELIMINATED

D: IF WE DUMP IT , 60% OF THE FIXED COSTS WILL BE ELIMINATED

FOR EACH CASE DECIDE WHETHER TO DUMP OR KEEP DIV. II AND GIVE A ONE OR TWO SENTENCE EXPLANATION FOR YOUR DECISION

Solutions

Expert Solution

Calculation of profit or loss of Division II at present situation:

Sales	5,000
Less: Variable cost	3,000
Contribution Margin	2,000
Less : Fixed cost	2,800
Loss	800

CASE A: KEEP

If we dump Div II, the fixed costs will remain in full. that means If we dump then fixed cost of 2800 will be loss with respect to Div II. However at present Div II has loss of only 800. Therefore Div II should keep and not to dump as it is saving loss by 2000 ( 2800 - 800 )

CASE B: DUMP

If we dump Div II, the fixed costs will totally eliminated. that means If we dump then fixed cost of 2800 will fully eliminated thus no profit and no loss. However at present Div II has loss of 800. Therefore Div II should dump and not to keep as it is saving loss by 800 if DIv II runs.

CASE C: KEEP

If we dump Div II, the fixed costs 50% will be eliminated. that means If we dump then fixed cost of 1400 (2800*50%) will eliminated and result in loss of 1400 (2800*50%) as fixed cost with respect to Div II. However at present Div II has loss of only 800. Therefore Div II should keep and not to dump as it is saving loss by 600 ( 1400 - 800 )

CASE D: KEEP

If we dump Div II, the fixed costs 60% will be eliminated. that means If we dump then fixed cost of 1680 (2800*60%) will eliminated and result in loss of 1120 ( 2800*40%) as fixed cost with respect to Div II. However at present Div II has loss of only 800. Therefore Div II should keep and not to dump as it is saving loss by 320 ( 1120 - 800 )

ekkarill92 answered 1 year ago

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