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Trio Ltd operates three divisions. The latest profit statements and is concerned that division
Gamma is making a loss.
(a) Advise Gamma whether or not to close down division C.
Division Alpha Beta Gamma
(000s) (000s) (000s)
Sales 150 120 60
Variable costs 90 75 45
Fixed costs 30 30 20
Profit/(loss) 30 15 (5)
(b) You are also informed that 50% of the fixed costs are division specific. The rest of the
fixed costs are allocated arbitrarily to the divisions from head office.
! Should division Gamma be shut down? Answer: If Gamma is closed:
• Revenue will decrease by $60,000
• Costs will decrease by $45,000 + $10,000 x 50% = $50,000
Therefore the division should not be closed. If it were, contribution would be reduced………….I can not understand the option (b)You are also informed that 50% of the fixed costs are division specific. The rest of the
fixed costs are allocated arbitrarily to the divisions from head office.
!And the line in Answer (costs will decrease by $45000+$10000 x 50%= $50,000 )..Would you explain for me?That line is incorrect. It should be $45,000 + 50% x $20,000 = $55,000.
So, the division should not be closed because more revenue will be lost than costa saved.
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