You received the following report from your boss… she said… "shut down South, we're not here to lose money".

 

Based on the current format, would the Opportunity be pursued by eany division? Fully explain.
Restate results in a more appropriate way.
How were common fixed costs alloacated to the Divisions? Is this an apprporiate allocation mehtod? Why?
The target cost of capital is 12%.
1/2 of the Fixed Costs in the Opportunity would be avoided if acquired and consolidated into one of our divisions. All remining FC would be Controllable.
Restate the Divisonal performance in a more appropriate way.
Based on the revised format which Division would want to pursue the "Opportunity"? Would the president want to pursue the Opportunity? Why?
If Return on Capital Employed were used to assess performance, which Division would seek out the Opportunity? Fully support and explain.
A new advertising campaign will cost $900 and will improve sales by 200 units. If we could only afford one campaign… which Division would get the campaign?
Should South be shut down? Fully explain.
Which Division is the best performer? Why?
Include a full residual income analysis.

Units Sales Variable costs Fixed costs Operating income You were able to find the following information: Capital employed Controllable fixed costs included in Fixed Costs Committed fixed costs included in Fixed Costs Remainder of Fixed costs are Common Fixed Costs East 3,000 $39,000 ($24,000) ($8,010) $6,990 East $70,000 ($6,000) ($1,400) West 5,000 South 12,000 West $45,000 ($16,000) ($3,000) Total 20,000 $62,500 $120,000 $221,500 ($35,000) ($96,000) ($155,000) ($13,350) ($32,040) ($53,400) $14,150 ($8,040) $13,100 South Total $50,000 $165,000 ($12,000) ($34,000) ($5,000) ($9,400) Opportunity 1,000 $14,000 ($10,000) ($5,000) ($1,000) Opportunity $8,500 ($3,000) ($1,000)