Question

The Lamar Company manufactures wiring tools. The company is currently producing well below its full capacity. The Boston Company has approached Lamar with an offer to buy 17,000 tools at $1.82 each. Lamar sells its tools wholesale for $1.92 each; the average cost per unit is $1.90, of which $0.34 is fixed costs. If Lamar were to accept Boston's offer, what would be the increase in Lamar's operating profits?

The King Company has two divisions—North and South. The divisions have the following revenues and expenses:

	North				South
Sales	$	950,000			$	900,000
Variable expenses		460,000				350,000
Traceable fixed expenses		270,000				220,000
Allocated common corporate expenses		260,000				200,000
Net operating income (loss)	$	(40,000	)		$	130,000

Management at King is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of:

The operations of Winston Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows:

	Blink Division				Blur Division				Total
Sales	$	290,000			$	172,000			$	462,000
Variable costs		100,000				79,000				179,000
Contribution margin	$	190,000			$	93,000			$	283,000
Direct fixed costs		86,000				72,000				158,000
Segment margin	$	104,000			$	21,000			$	125,000
Allocated common costs		41,000				33,500				74,500
Operating income (loss)	$	63,000			$	(12,500	)		$	50,500

Operating income for Winston Corporation, as a whole, if the Blur Division were dropped would be:

Answer 1

1) Lamar Co. Is operating below it's capacity so fixed cost is not being absorbed fully and even though the operation of company is below capacity, fixed cost has to be incurred in full. Hence while deciding the offer of Boston company, fixed cost becomes an irrelevant factor.

Average Cost including fixed cost of $0.34 is $1.90

So excluding fixed cost element, Variable cost becomes $(1.90-0.34) =$1.56

Offer of Boston Company is for $1.82

Hence contribution of each unit will be $(1.82-1.56) = $0.26

Total units =17,000

So, Total contribution is of $(17,000*0.26) = $4,420

Hence profit would increase by $4,420

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