Question

GT has three products that it sells: Copper, Bauxite, and Gravel. Results of the fourth quarter are presented below:

	copper	bauxite	Gravel	total
Tonnage sold	10,000	20,000	20,000
revenue	22,000,000	40,000,000	23,000,000	85,000,000
Variable cost	17,000,000	22,000,000	12,000,000	51,000,000
Direct fixed costs	1,000,000	3,000,000	2,000,000	6,000,000
Allocated fixed costs	8,000,000	8,000,000	8,000,000	24,000,000
Net income	4,000,000	7,000,000	1,000,000	4,000,000

The allocated fixed costs are unavoidable. Demand of individual products is not affected by changes in other product lines.

Q. Do a financial analysis of what will happen to profits if GT sells the copper division?

Answer 1

Financial Analysis on sale of Copper product line:

The allocated fixed costs are unavoidable and on sale of product line "Copper", the allocated fixed cost gets apportioned to the remaining product lines i.e, Bauxite & Gravel in equal proportion.

Allocation of Unavoidable fixed cost of 24,000,000 to both the products

Product Bauxite = 12,000,000

Product Gravel  = 12,000,000

Therefore there has been an increase in total cost of both the products by 4,000,000 each and the resultant net income will be as follows

Product Bauxite = 7,000,000 - 4,000,000 = 3,000,000.

Product Gravel = 1,000,000 - 4,000,000 = -3,000,000.

Bauxites net income reduced to 3,000,000 whereas Gravel has been into losses with total loss turning out to be 3,000,000.

As a whole total net income of GT after sale of Copper Segment has been 'Nil' Bauxite with profit and Gravel with Loss.