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Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the previous...

Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the previous year:

Myrtle Laurel Total
Sales $ 562,300 $ 338,600 $ 900,900
Variable Costs 178,600 176,400 355,000
Contribution Margin 383,700 162,200 545,900
Fixed Costs (allocated) 286,875 173,025 459,900
Profit Margin $ 96,825 $ (10,825 ) $ 86,000


What would Clay’s profit margin be if the Laurel division was dropped and all fixed costs are unavoidable?

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Answer #1

Profit margin if the Laurel Division is dropped and all fixed costs are unavoidable =

Therefore, there is loss of $76,200 if Laurel division is dropped off.

Note - Fixed costs are unavoidable, means they will be incurred even if division is dropped. Therefore, total fixed costs of Clay Inc. are considered, which includes fixed cost of Laurel division.

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