Problem:
In a belt-tightening measure, the Sandalwood company is taking a close look at its four divisions with an eye toward closing any unprofitable ones. Costs incurred at the corporate headquarters level have been distributed to each division in proportion to sales revenue. All costs incurred by each division except the allocated corporate headquarters costs are considered to be avoidable if a division is shut down. The corporate headquarters costs amount to $975,000.
Divisions ($000s)
Total Northgate Edgewood Weston Southboro
Sales $3800 $1520 $570 $1140 $570
Costs $3650 $1225 $380 $1685 $360
Profits (losses) $150 $295 $190 $ (545) $210
Required:
Q1. Based on the above information, what recommendation would you make concerning possible division closings? Show all calculations.
Q2. Since the above data represents semiannual information, what other variables should be included in the decision to close down a division?