Answer:
<em>Department C should be closed</em>
Explanation:
To determine whether or not it will be profitable to drop a loss making department, we compare the savings in fixed cost to the lost contribution from the division.
For Howard Enterprises, the department with a negative contribution should be closed otherwise its operation would reduce the overall profit by the amount of the negative contribution.
So lets work out the contribution for each department by adding back the apportioned fixed cost. See table below
A B C
$ $ $ Total
Sales Revenue 12,000 48,000 40,000 100,000
Operating cost 11,400 59,800 50,500
Operating income 600 (11,800) (10,500)
*Add back apportioned fixed cost<u> 3,000 12,000 10,000</u>
Contribution 3,600 200 (500)
*Apportioned fixed cost
A- 12,000/100,000× 25,000 = 3,000
B- 48,000/100000 × 25,000 = 12,000
C- 40,000/100,00×25,000 = 10,000
From the above analysis, Department C generates a negative contribution.<em> It implies that it can barely cover its direct cost and so will deplete the total profit by its negative contribution. Hence, it should be closed</em>
<em>Department C should be closed</em>
