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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?
My query is that here if we shut down the div A then we saved $75m yeah thats true but we dont incurred $100m loss so althogether we got $175m saving but and div B has $10m loss
so the answer should be 165 net income isnt it
but the answer is $35m… I dont get it ??You lose the revenue that would have been earned otherwise.
You save the variable costs, but will not save all of the fixed costs ….
So 1000 – 400 – 650 – 25 = 75
…. Rev….VC..DIV FC..50% HO costs = 75current div a&b loss = 110 agreed?
Compared to 75 as above therefore a difference of 35
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