Accounting for Managers: Interpreting accounting information for decision-making

414 ACCOUNTING FOR MANAGERS

8.4
Current position:

Eastern Western Total

££ £

Sales 550,000 500,000 1,050,000

Variable costs 275,000 200,000 475,000

Direct fixed costs 180,000 150,000 330,000

Contribution to corporate costs 95,000 150,000 245,000

Allocated corporate costs 170,000 135,000 305,000

Operating profit (75,000) 15,000 (60,000)

After closure of Eastern division:

Eastern Western Total

££ £

Sales – 500,000 1,050,000

Variable costs – 200,000 200,000

Direct fixed costs – 150,000 150,000

Allocated corporate costs – 305,000 305,000

Operating profit (155,000) (155,000)

The Eastern division should not be closed. It currently contributes £95,000 towards corporate
costs. If the division were closed, the corporate costs would remain unchanged and the
current loss of £60,000 would increase to £155,000.

8.5
Last year Current year
Sales price 80
Variable cost 55
Contribution margin 25 +20% (£5) 30
Units 5,000 5,000

Contribution 125,000 150,000

−Fixed costs 25,000 −10% (£2,500) 22,500

Operating profit 100,000 127,500

Contribution margin is £25(£80−£55)+20%=£5× 5 ,000 units=+£25, 000

Fixed costs £25, 000 ×10%=+£2, 500

Increase in profit is £27, 500