Question

DSQ Company Ltd, a diversified company, has three divisions, cement, fertilizers

Q3) DSQ Company Ltd, a diversified company, has three divisions, cement, fertilizers and textiles. The summary of the company’s profit is given below :

(Rs/Crore)
Cement Fertilizer Textiles Total
Sales 20.0 12.0 18.0 50.0
Less : Variable Cost 8.0 9.6 5.4 23.0
Contribution 12.0 2.4 12.6 27.0
Less : Fixed Cost (allocated to divisions in proportion to volumes of Sales) 8.0 4.8 7.2 20.0
Profit (Loss) 4.0 (2.4) 5.4 7.0


After allocating the company’s fixed overheads to products the Fertilizers, division incurs a loss of Rs 2.4 crore. Should the company drop this division?

Answer 1

- As per the question, this is how data looks like in tabular form:

	Cement	Fertilizer	Textiles	Total
Sales	20	12	18	50
Less: Variable Cost	8	9.6	5.4	23
Contribution	12	2.4	12.6	27
Less: Fixed Cost allocation	8	4.8	7.2	20
Net Profit	4	-2.4	5.4	7

- It should be noted that Fixed Overheads are allocated to divisions on the basis of Volume of Sales.

- Looking atprofit, though Fertilizer divisions incurs loss but it contributes a positive contribution of 2.4 crore to the DSQ Company.

- DSQ company should analyze if by closing the fertilizer division, it can save a fixed cost of more than 2.4 crore then it should close the division. If not, then it should not close the division.

- Company should look at the traceable fixed overheads instead of allocating the entire overhead on sale volume basis.

- Company should allocate a particular department fixed overhead to that department only and rest of the common cost should be allocated may be on sale volume or any other driver decided by company.

- Currently all costs are being allocated which gives the wrong impression.