Shirley Inc. has three divisions, King, West and Gold. All fixed costs are unavoidable. Following is the income statement for the previous year: KingWestGold TotalSales$1,000,000 $575,000 $425,000 $2,000,000Variable Costs 400,000 345,000 300,000 1,045,000Contribution Margin 600,000 230,000 125,000 955,000Fixed Costs (allocated) 375,000 215,625 159,375 750,000Profit Margin$225,000 $14,375 $(34,375) $205,000a. What would Shirley's profit margin be if the West division were dropped?b. What would Shirley's profit margin be if the Gold division were dropped?
What will be an ideal response?
a. ($25,000) = $600,000 + 125,000 - 750,000
b. $80,000 = $600,000 + 230,000 - 750,000
The profit margin if a division is dropped equals the contribution margin from the other divisions minus direct fixed costs of the other divisions and total common fixed costs.
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