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  • 1.  PART 2 KEEP OR DROP DECISION

    Posted 10-03-2022 01:52 AM
    Dear CMA Friends,

    I need you help in this.

    Regards

    A retail company has three segments with total operating income of $500,000. Selected financial information for Segment 1 is presented below:
    Segment 1
    Unit sales
    28,000
    Sales revenue
    $700,000
    Cost of sales
    420,000
    Administrative expenses
    144,000
    Commissions
    14,000
    Rent
    140,000
    Salaries
    32,000
    1. Administrative expenses are allocated to the three segments equally.
    2. Commissions are paid to the salespersons in each segment based on 2% of gross sales.
    3. The company rents the entire building and allocates the rent to the three segments based on the square footage occupied by each.
    4. Salaries represent payments to the employees in the segment.

    The controller has expressed concern about the operating loss for Segment 1 and has suggested that it be closed. If the segment is closed, none of the employees would be retained. Should the company drop Segment 1?



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    TIMUCIN ONER
    Director/Manager
    ANTALYA
    Turkey
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  • 2.  RE: PART 2 KEEP OR DROP DECISION

    Posted 10-05-2022 09:19 AM
    The answer is D.
    Contribution Margin 700k-420k = 280k will be lost income
    Commission and Salaries will be avoided = 14k + 32k (expense will decrease)
    Net impact to the company is ($234K)

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    Billy
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  • 3.  RE: PART 2 KEEP OR DROP DECISION

    Posted 10-07-2022 01:15 AM
    Dear Billy,

    Thank you for the help. I guess I miss the point that salesforce will not be retained.

    Regards

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    Timucin ONER
    Finance & Contract Director
    Antalya Turkiye
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