Dec 2010 Q 1 Corporate reconstruction

EPEsther Pang14y ago

Hi there,

In this question part (c) management buyout, I don't understand why the model answers pro rata the the costs on the basis of two-third. 2/3

What i understand from the passage which says that the parts division is half the size of the fridge division..... So, i would think that it should be one-half, 1/2 instead of two-third.

Can anyone explain why it used 2/3 instead of 1/2?

Thank you so much

((deleted)14y ago#1

Well the complete business consists of both the parts and the fridge division right? and parts division is 1/2 the size of fridge division?

So if you look at it, the complete organization is:
33% Parts
66% Fridge

When pro rata is applied, 2/3 or 66% (Fridge business) is applied on the TOTAL amounts of the organization, leaving out the 1/3 or 33% (Parts business).

The parts business still is 1/2 or 50% of the fridge business. I.e. 33/66 = 50%

EPEsther Pang14y ago#2

hi there, thanks for your reply. i get that now. thank you.

Mmrxamag14y ago#3

Thanks :)