Accounting for Managers: Interpreting accounting information for decision-making

MARKETING DECISIONS 117

Case study: Retail Stores PLC – the loss-making division...........

Retail Stores has three segments, producing the results in Table 8.4. The con-
tribution as a percentage of sales, assuming a constant sales mix, is 70.6%
(£600,000/£850,000). The company’s breakeven point in sales is calculated as:

fixed costs

unit contribution as a % of sales

=

280 , 000 + 255 , 000

0. 706

=

535 , 000

0. 706

or £758,000.
Current sales of £850,000 represent a margin of safety of:

expected sales−breakeven sales

expected sales

× 100 =

£850, 000 −£758, 000

£850, 000

or 10.8%.
Management is considering dropping the Toys segment due to its reported loss
after deducting avoidable segment-specific fixed costs and unavoidable business-
wide costs, which are allocated as a percentage of sales revenue.
However, an understanding of cost behaviour helps to identify that each
segment is making a positive contribution to business-wide costs after deducting
the segment-specific fixed costs, as the modification to the reported profits in
Table 8.5 demonstrates.
Based on the figures in Table 8.5, despite the Toys segment making a loss,
it makes a positive contribution of £30,000 to allocated business-wide costs.
If the Toys segment was discontinued, total profit would fall by £30,000, as
Table 8.6 shows.
This is because the loss of the contribution by the Toys segment to business-wide
costs and profits amounts to £30,000 (after deducting avoidable segment-specific
fixed costs). The business-wide costs of £255,000 are reallocated over the two
remaining business segments in proportion to sales revenue, which in turn makes
the Electrical segment appear only marginally profitable.
If the Toys division were discontinued, the impact would be to reduce
costs by £60,000 and a new, higher contribution as a percentage of sales

Table 8.4 Retail Stores PLC – analysis of trading results

Clothing Electrical Toys Total

Sales 400,000 300,000 150,000 850,000
Variable costs 25% 30% 40%
100,000 90,000 60,000 250,000

Contribution 300,000 210,000 90,000 600,000
Segment-specific fixed costs 120,000 100,000 60,000 280,000
Allocated business-wide costs (as a
% of sales revenue)

120,000 90,000 45,000 255,000

Profit/(loss) 60,000 20,000 (15,000) 65,000