Question
Lucy Ltd has three divisions which are in competition with each other, selling slightly different products. Annual results (including per unit sales) show: Division A
Lucy Ltd has three divisions which are in competition with each other, selling slightly different products. Annual results (including per unit sales) show:
Division A Division B Division C
Sales 6,000@$20 10,000@$14 14,000@$15
Variable costs $8 per unit $6 per unit $8 per unit
Fixed costs $11,000 $48,000 $15,000
The company believes that if it drops Division B, sales of Division A will increase by 3000 units and sales of Division C by 2000 units. Analysis reveals that $36,000 of fixed costs relating to Division B are avoidable for the company if Division B is closed.
Required:
What is the incremental effect on the profit/loss of the company if it closes Division B? Please show all calculations
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