Question

Power Inc. has two divisions, Windsor and Ridge. Following is the income statement for the past month: Windsor Ridge Total Sales $ 360,200 $ 320,100 $ 680,300 Variable Costs 280,200 150,200 $ 430,400 Contribution Margin $ 80,000 $ 169,900 $ 249,900 Fixed Costs (allocated) 121,700 128,200 $ 249,900 Profit Margin $ (41,700 ) $ 41,700 $ 0 What would Power's profit margin be if the Windsor division was dropped and all fixed costs are unavoidable?.

Answer 1

Answer:

- $ 80,000

Explanation:

The existing Power's profit margin is $0 ($41,700 - $41,700 + $0).

Dropping Windsor division has the following effect :

Increase in cost - opportunity cost of $ 80,000

The opportunity is due to lost contribution

Fixed costs are unavoidable thus, they are irrelevant when doing this calculation.

thus,

Power's profit margin will be - $ 80,000 if the Windsor division was dropped.