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Lauda Co has two divisions with the following results in the table below:
Division A Division B————————————-Division A——Division B
—————————————–$m————–$m
Sales revenue——————–1000————1240
Variable costs———————400————–500
Contribution———————–600————–740
Divisional fixed costs————650————-600
Allocated Head Office costs—-50————-150
Divisional net loss—————(100)————(10)If a division is shut down, then Lauda Co will avoid all the division’s specific costs and half of the Head Office costs allocated to the division.
What will be the revised total divisional net loss if Lauda Co chooses to shut down Division A?
What does this line mean by ‘avoid all the division’s specific costs’ what is that cost in the question?
I don’t understand this please help me how to answer these like questions!
The specific fixed costs for Division A are 650 and so these will not be incurred if Division A is shut down. The allocated head office costs would normally be assumed to remain (but in this question only half of them will remain).
Have you watched my free lectures on shut-down decisions?
Yes I have seen your lecture frequently and this is what I understood.
If division A is shut down then we’ll save divisional fixed costs of $650m and half of allocated head office cost of $25m plus the variable costs of $400m so the total costs saved is $1075. While we lose sales revenue of $1000m so it will change our net loss of $100m to the net profit of $75m.
When considering a shutdown situation we always lose sales revenue that we would be earning otherwise but we’ll save all the costs related to production.
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