Problem - General Consulting plc has four divisions, whose summary profit reports are shown below:
|
(in £'000)
|
I.T.
|
Finance
|
Strategy
|
M&A
|
Total
|
|
Income
|
1,200
|
1,700
|
900
|
1,500
|
5,300
|
|
Variable staff costs
|
600
|
900
|
350
|
600
|
2,450
|
|
Contribution margin
|
600
|
800
|
550
|
900
|
2,850
|
|
Fixed costs
|
471
|
885
|
804
|
490
|
2,650
|
|
Operating profit/(loss)
|
129
|
(85)
|
(254)
|
410
|
200
|
The senior partners are considering whether or not to continue with the Finance and Strategy consulting activities as these have consistently been loss-makers. The Chief Accountant has advised the senior partners that business-wide costs which are included in fixed costs total £1,200,000. Business-wide costs will continue irrespective of the closure of any division. Those costs are allocated to the four divisions in proportion to their income. The remaining fixed costs in each division are attributable to that division and cover the cost of staff whose expertise means that they can only work in that division. If a division is closed, these fixed costs would be avoidable.
a. Present the financial information in a more meaningful form, showing the contribution each division makes to total profitability
b. Ignoring any redundancy payments, advise the senior partners as to
i. which, if any, divisions should be closed, and
ii. the likely profit, assuming constant sales, if those divisions were closed.
c. By re-presenting the financial information, explain the consequences to remaining divisional profitability if any division is closed.