Question

1. Gobez building materials manufacturing company is organized into three departments which are engaged in different business lines. Presented below is the 2015 income statement for the company.

Particulars	Department -A	Department-B	Department-C
Sales Variable manufacturing cost Variable selling & admin. Costs	$200,000 ($125,000) ($15,000)	$125,000 ($90,000) ($10,000)	$145,000 ($80,000) ($15,000)
Contribution margin Fixed manufacturing costs Fixed selling & admin. Cost	$60,000 ($30,000) ($15,000)	$25,000 ($20,000) ($15,000)	($50,000) ($25,000) ($10,000)
Operating income	$15,000	($10,000)	($15,000)

The manufacturing of the company is considering dropping department-B because it seems to be unprofitable. Assume that 90% of the fixed manufacturing costs and 50% of fixed selling administrative costs of department –B are allocated costs and will continue even if this department is discontinued.

Instructions:

1. Assuming that the vacated facilities are left idle if department “B” is discounted, should the company drop department “B”?
2. Assuming that the vacated facilities can be used to expand department “C” which results in the department ‘C’s sales to in cease by 30%. This requires the company to increase departments C’s specific fixed costs by $8,000. Should the drop department “B”?

Answer 1

At the initial stage of a company, they may handle by itself. Once the company has become expanding then they will think to Decentralised or making an department of a company.

The main reason for Decentralised or making department are if it is Decentralised then they will easily manage the Company.

It is also help full to identify which department is earning more income. It will also help to increase the turnover of the each department.

Sometimes companies also may provide some incentives to the employees of specific department if they are earning huge income or savings the expense.

If in any case, the specific department are not working properly or not operating well then the company may think to discontinue the operations for specific department.

While they are thinking to discontinue, then they will see whether it is to be discontinue or not by way of comparing or analysing the profit or loss incase if it is discontinued or not

Once we have been made an analysis or comparison then they will decide on the basis of if losses is more in case of discontinue than the losses in operation then it is not require to discontinue.

(1) If Department B are discontinued and keeping in idle.

Actually if department B are discontinued, even though that we have to be incur some fixed expenses just like Committed cost like

90% of Fixed Manufacturing cost: 20000* 90% = 18,000

​​​​​​50% of Selling and distribution cost: 15000* 50% = 7,500

Total cost to be incurred even discontinue = 25,500

Loss if it is not discontinue department B = 10,000

There fore it is stating that if it is not discontinue then the loss will be less. If it is continuing the operations, then we will save cost of 15,500.

There fore discontinuing the department B and keeping idle is not good option .

(2) Discontinue the Department B and using that resources for department C

Fixed cost to be incurred even if it is discontinued B =25,500

​​​​​​Additional fixed cost to be incurred for Dept C = 8,000

Computation of Profit volume ratio for Department C:

Profit Volume Ratio: (Contribution ÷ Sales )* 100

(50,000 ÷ 1,40,000) *100 = 35.72%

Particulars	Amount
Sales. 140000*30%	42,000
Contribution (42,000* 35.72%)	15,000
Additional Fixed cost	(8000)
Profit	7,000
Loss due to discontinue B	(25,500)
TOTAL LOSS if discontinue B	(18,500)
Total loss if Not discontinue	(10,000)

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Therefore after making analysis that it is better to not to discontinue the department B.

. If it is discontinued then the loss will be high. So if it is continue the operations then they will reduce the losses.

There are also having an another option to the company that instead of making they may verify with prices and income if they has been purchased.

If cost is less in case of purchase of product by comparing between purchase of the product and manufacturing the product.In that case cost of product also will be reduce.

Therefore I am suggesting that, before we are taking an action once compare the operating income by way of purchase or manufacturing the product.

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