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22 A company has three branches (X, Y and Z) to which the following budgeted information
60% of the total fixed costs are general overheads. General overheads are apportioned to the branches on the basis of sales value. The other fixed overheads are specific to each branch and are avoidable if a branch closes down.
If branch Z is closed down and the sales of the other two branches remained the same, what would be the revised budgeted profit for the company?
000 000 000
X Y Z Total
Sales 200 200 200 600Contribution 60 50 20 130
Fixed costs 35 35 30 100
Profit/loss 25 15 (10) 30Hello Sir ,
Sir ans is 10000 as budgeted profit fot the company and 10000 is considered as the the specific fixed costs of branch z
But sir from the total fixed overheads of 100000 40 % is fixed which is 40000 and then the fixed costs are apportioned on sales value method so that would be total sales 600k and proportion for every branch is 200k that would be 2/6 so specific foxed costs of branch z should be 100k *2/6 = 13333.3 $
Can please explain me the right approach ur help will be appreciatedThe question asks for the new total profit of the company after closing Z and therefore how the fixed overheads are apportioned in future is of no relevance at all to the total profit.
They are currently making a total profit of 30.
If they close Z then they lose the contribution from Z of 20, and they save the specific fixed overheads of Z. Currently the general fixed overheads are 60% x 100 = 60 (and this total will stay the same if Z is closed down). Of the 60, the amount apportioned to Z is 200/600 x 60 = 20, and therefore the specific fixed overheads of Z are 30 – 20 = 10, and it is this 10 that will be saved.
Therefore the new profit is 30 – 20 + 10 = 20.
Have you watched my free lectures on ‘shutdown problems’?
I explain in my previous reply the calculation of the specific fixed costs of 10,000.
The new profit is 20,000 (not 10,000) as I have explained.
Either there is a mistake in the answer that you have, or you have misread it and the answer is stating that the new profit is 10,000 lower than the current profit (20,000 instead of 30,000).
(If you tell me the book in which you found this question then I will check the wording of the question and answer myself 🙂 )
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