Reference no: EM133062606
Question - The Builders Corporation has four divisions defined by their state of operations: Arizona, California, New Mexico, and Vermont. The income statement (in thousands of dollars) for the Corporation is:
|
|
Arizona
|
California
|
New Mexico
|
Vermont
|
Total
|
|
Revenues
|
3,000
|
2,800
|
3,200
|
1,200
|
10,200
|
|
Cost of Goods Sold
|
-1,700
|
-1,300
|
-2,200
|
-400
|
-5,600
|
|
Gross Margin
|
1,300
|
1,500
|
1,000
|
800
|
4,600
|
|
Divisional Overhead
|
-400
|
-350
|
-450
|
-500
|
-1,700
|
In addition to each division's own overhead, Builders Corporation incurred corporate overhead costs of $2.1 million that was fixed. This corporate overhead had in the past been allocated to the divisions based on Cost of Goods Sold which mainly consists of direct labor. Moore, the manager of the New Mexico division had suggested at a recent meeting that it might be more appropriate to allocate corporate overhead costs based on Gross Margin. (For the sake of simplicity assume that all revenues and expenses are cash flows).
Required -
1. Calculate the profitability of each division using Cost of Goods Sold to allocate corporate overhead. Which division is the most profitable? Which division is the least profitable?
2. Let's assume that for strategic reasons senior management decides to close down Vermont. By how much should corporate overhead be reduced for the decision to be economically attractive?
3. Let's assume that senior management closes down Vermont and corporate overhead remains at $2.1 million. How does the profitability of Builders Corporation change?
4. Assuming that corporate overhead remains at $2.1 million regardless of how many divisions the company has. Should senior management close the division that is least profitable?