Question

18) Howard Enterprises, which has three departments, recently reported the following results

: Sales revenue

A: $ 12,000

B:$ 48,000

C:40,000

Less: Operating costs

A:11,400

B:59,800

C:50,500

Operating income (loss) A:$ 600

B:$ (11,800 )

C: $ (10,500 )

The company incurred variable operating costs as well as $25,000 of fixed operating costs. The $25,000 amount was allocated to A, B, and C on the basis of sales revenue and is included in the cost figures noted above. Which department(s), if any, should be closed if none of the fixed operating costs can be avoided?

A) Department A.

B) Department B.

C) Department C.

D) Departments B and C.

Answer 1

	A	B	C	(A X B) /C = D	E	E - D = F
	Sales	Total fixed cost	Total sales	Fixed cost allocation	Operating costs	Variable cost
Dept. A	$12,000	$25,000	$1,00,000	$3,000	$11,400	$8,400
Dept. B	$48,000	$25,000	$1,00,000	$12,000	$59,800	$47,800
Dept. C	$40,000	$25,000	$1,00,000	$10,000	$50,500	$40,500
	$1,00,000

	Dept. A	Dept. B	Dept. C
Sales	$12,000	$48,000	$40,000
Variable cost	$8,400	$47,800	$40,500
Contribution margin	$3,600	$200	-$500
Fixed cost	$3,000	$12,000	$10,000
Operating income (Loss)	$600	-$11,800	-$10,500

Department C should be dropped because it has negative contributio margin.

Department C

Option C)