Question

The following information was made available concerning the four departments of the Snake-Bite Company.

                                               A                 B                  C                  D

Sales (in $)                       100,000        25,000          50,000          75,000

Variable cost of gods sold 70,000        15,000          30,000           50,000

Variable selling expenses    10,000          2,000            6,000          12,000

Contribution margin        20,000        8,000          14,000          13,000

Fixed costs                        20,000          5,000          10,000          15,000         

Profit                                           0        3,000          4,000          (2,000)

The president of the company has decided that one department must be dropped. Fixed costs have been assigned according to the sales of each department. Regardless of your decision, fixed costs will be reduced by 25%. Which department should be dropped so as to give the greatest benefit to the company?

Answer 1

6

Total Fixed costs = 20000+5000+10000+15000 = 50000

FC reduced by 25 % = 50000-25% = 37500 is to be assigned to each department bsed on their sales

A : B : C : D = 100000 : 25000 : 50000 : 75000 = 4 : 1 : 2 : 3

	A	B	C	D
Contribution	20000	8000	14000	13000
Fixed cost = 37500 in the ration of 4:1:2:3	15000	3750	7500	11250
Profit	5000	4250	6500	1750

If decision is taken on the basis of contribution then Department B has to be dropped.

If decision is taken on the basis of Profit , then Department D has to be dropped.