Answer :
Let's carefully address each part of the question step-by-step.
### Part (a): Evaluate the President's Remark
To evaluate whether Division Y is a drag on the company, we need to compute the contribution margin for each division. The contribution margin tells us how much each dollar of sales contributes towards covering the fixed expenses and generating a profit.
Given Data:
- Sales and Variable Expenses for each division:
- Division X: Sales = [tex]$176,000, Variable Expenses = $[/tex]119,000
- Division Y: Sales = [tex]$116,000, Variable Expenses = $[/tex]64,000
- Division Z: Sales = [tex]$156,000, Variable Expenses = $[/tex]84,000
Contribution Margin Calculation:
[tex]\[ \text{Contribution Margin} = \text{Sales} - \text{Variable Expenses} \][/tex]
So,
- Division X: \( \[tex]$176,000 - \$[/tex]119,000 = \$57,000 \)
- Division Y: \( \[tex]$116,000 - \$[/tex]64,000 = \$52,000 \)
- Division Z: \( \[tex]$156,000 - \$[/tex]84,000 = \$72,000 \)
### Part (b): Calculate the Company's Net Income if Division Y Were Closed Down
To determine the net income if Division Y were closed down, we follow these steps:
1. Calculate the combined sales and variable expenses without Division Y.
- Combined Sales without Y: \( \[tex]$176,000 + \$[/tex]156,000 = \$332,000 \)
- Combined Variable Expenses without Y: \( \[tex]$119,000 + \$[/tex]84,000 = \$203,000 \)
2. Calculate the combined contribution margin without Division Y.
[tex]\[ \text{Contribution Margin without Y} = \[tex]$332,000 - \$[/tex]203,000 = \$129,000 \][/tex]
3. Calculate the fixed expenses allocation.
General corporate expenses (total) were \[tex]$148,000, including \$[/tex]85,500 corporate expenses divided between the divisions. Therefore, if we don't allocate the corporate expenses to Division Y:
- Non-corporate Fixed Expenses: \( \[tex]$148,000 - \$[/tex]85,500 = \$62,500 \)
- Remaining Fixed Expenses without Y: \( \$62,500 - (\text{Fixed divided by each division}) \)
We need to remove Y's share of expenses too:
- Fixed Expenses Allocation: \( (85,500 / 3) = 28,500 \)
- Remaining Fixed Expenses without Y: \( \text{62,500 - (28,500)} = 34,000 \)
4. Compute the new net income without Division Y.
[tex]\[ \text{Net Income without Y} = \text{Contribution Margin without Y} - \text{Remaining Fixed Expenses without Y} \][/tex]
[tex]\[ \text{Net Income without Y} = \[tex]$129,000 - \$[/tex]98,666.67 \approx \$30,333.33 \][/tex]
### Part (c): Policy Statement Related to the Allocation of Fixed Expenses
The policy statement should reflect the rationale behind how general corporate expenses and fixed expenses are allocated to each division. Here's a possible policy statement:
"General corporate expenses, which pertain to the entire organization and are not directly attributable to any single division, shall be allocated evenly across all operating divisions. This allocation policy ensures that each division contributes a fair share to the overall administrative and operational overheads, reflecting a balanced and equitable distribution of central costs."
### Conclusion for Part (a)
From the calculations above:
- Contribution margins are:
- Division X: \$57,000
- Division Y: \$52,000
- Division Z: \$72,000
While Division Y has positive contributions, whether it's a "drag" must consider its relative performance to other divisions and the overall fixed costs. After deducting the fixed expenses, Division Y still contributes positively above the fixed expenses, suggesting it isn’t necessarily a drag but less profitable relative to others.
The president's decision to close Division Y should consider the net impact and whether reallocation would lead to better resource utilization.
### Conclusion for Part (b)
If Division Y were closed, the company's net income would approximately be \( \$30,333.33 \). This amount shows a reduction compared to maintaining all three divisions operational.
By providing this structured solution, you gain clear insight into evaluating business divisions and the impact of closing a division through careful financial analysis.
### Part (a): Evaluate the President's Remark
To evaluate whether Division Y is a drag on the company, we need to compute the contribution margin for each division. The contribution margin tells us how much each dollar of sales contributes towards covering the fixed expenses and generating a profit.
Given Data:
- Sales and Variable Expenses for each division:
- Division X: Sales = [tex]$176,000, Variable Expenses = $[/tex]119,000
- Division Y: Sales = [tex]$116,000, Variable Expenses = $[/tex]64,000
- Division Z: Sales = [tex]$156,000, Variable Expenses = $[/tex]84,000
Contribution Margin Calculation:
[tex]\[ \text{Contribution Margin} = \text{Sales} - \text{Variable Expenses} \][/tex]
So,
- Division X: \( \[tex]$176,000 - \$[/tex]119,000 = \$57,000 \)
- Division Y: \( \[tex]$116,000 - \$[/tex]64,000 = \$52,000 \)
- Division Z: \( \[tex]$156,000 - \$[/tex]84,000 = \$72,000 \)
### Part (b): Calculate the Company's Net Income if Division Y Were Closed Down
To determine the net income if Division Y were closed down, we follow these steps:
1. Calculate the combined sales and variable expenses without Division Y.
- Combined Sales without Y: \( \[tex]$176,000 + \$[/tex]156,000 = \$332,000 \)
- Combined Variable Expenses without Y: \( \[tex]$119,000 + \$[/tex]84,000 = \$203,000 \)
2. Calculate the combined contribution margin without Division Y.
[tex]\[ \text{Contribution Margin without Y} = \[tex]$332,000 - \$[/tex]203,000 = \$129,000 \][/tex]
3. Calculate the fixed expenses allocation.
General corporate expenses (total) were \[tex]$148,000, including \$[/tex]85,500 corporate expenses divided between the divisions. Therefore, if we don't allocate the corporate expenses to Division Y:
- Non-corporate Fixed Expenses: \( \[tex]$148,000 - \$[/tex]85,500 = \$62,500 \)
- Remaining Fixed Expenses without Y: \( \$62,500 - (\text{Fixed divided by each division}) \)
We need to remove Y's share of expenses too:
- Fixed Expenses Allocation: \( (85,500 / 3) = 28,500 \)
- Remaining Fixed Expenses without Y: \( \text{62,500 - (28,500)} = 34,000 \)
4. Compute the new net income without Division Y.
[tex]\[ \text{Net Income without Y} = \text{Contribution Margin without Y} - \text{Remaining Fixed Expenses without Y} \][/tex]
[tex]\[ \text{Net Income without Y} = \[tex]$129,000 - \$[/tex]98,666.67 \approx \$30,333.33 \][/tex]
### Part (c): Policy Statement Related to the Allocation of Fixed Expenses
The policy statement should reflect the rationale behind how general corporate expenses and fixed expenses are allocated to each division. Here's a possible policy statement:
"General corporate expenses, which pertain to the entire organization and are not directly attributable to any single division, shall be allocated evenly across all operating divisions. This allocation policy ensures that each division contributes a fair share to the overall administrative and operational overheads, reflecting a balanced and equitable distribution of central costs."
### Conclusion for Part (a)
From the calculations above:
- Contribution margins are:
- Division X: \$57,000
- Division Y: \$52,000
- Division Z: \$72,000
While Division Y has positive contributions, whether it's a "drag" must consider its relative performance to other divisions and the overall fixed costs. After deducting the fixed expenses, Division Y still contributes positively above the fixed expenses, suggesting it isn’t necessarily a drag but less profitable relative to others.
The president's decision to close Division Y should consider the net impact and whether reallocation would lead to better resource utilization.
### Conclusion for Part (b)
If Division Y were closed, the company's net income would approximately be \( \$30,333.33 \). This amount shows a reduction compared to maintaining all three divisions operational.
By providing this structured solution, you gain clear insight into evaluating business divisions and the impact of closing a division through careful financial analysis.
