Jack has provided a divisional performance report for his business for the last period. The online retail business operates from one location, buying stock of three products (A, B and C) which it re-sells with a mark-up. Divisional costs represent the cost price of the goods plus wages of the staff who manage those product orders. Common costs include all other expenses such as rent, administration, and advertising. Common costs are allocated based on income.

Required: (a) Do you think the allocation of common costs is appropriate? Why or why not? Explain with an example. (2 marks)

(b) Based on the above report, Jack thinks it is not worthwhile selling item C anymore. Do you agree with him? Explain and justify your answer.

\begin{tabular}{|l|c|c|c|c|} \hline & Product A & Product B & Product C & Totals \\ & $ & $ & $ & $ \\ \hline Divisional income & 50,000 & 70,000 & 80,000 & 200,000 \\ \hline Divisional costs & (25,000) & (30,000) & (65,000) & (120,000) \\ \hline Divisional contribution & 25,000 & 40,000 & 15,000 & 80,000 \\ \hline Common costs & (12,500) & (17,500) & (20,000) & (50,000) \\ \hline Divisional profit & 12,500 & 22,500 & (5,000) & 30,000 \\ \hline \end{tabular} \begin{tabular}{|l|c|c|c|c|} \hline & Product A & Product B & Product C & Totals \\ & $ & $ & $ & $ \\ \hline Divisional income & 50,000 & 70,000 & 80,000 & 200,000 \\ \hline Divisional costs & (25,000) & (30,000) & (65,000) & (120,000) \\ \hline Divisional contribution & 25,000 & 40,000 & 15,000 & 80,000 \\ \hline Common costs & (12,500) & (17,500) & (20,000) & (50,000) \\ \hline Divisional profit & 12,500 & 22,500 & (5,000) & 30,000 \\ \hline \end{tabular}