You run a business with four branches. Here are the branches\' performance figur
ID: 2437037 • Letter: Y
Question
You run a business with four branches. Here are the branches' performance figures. Captain Corporal General Sergeant Revenue 500,000 2,500,000 400,000 1,100,000 Variable costs 450,000 1,000,000 250,000 660,000 Fixed costs Factory rent 200,000 200,000 200,000 200,000 General admin 60,000 55,000 35,000 60,000 Executive costs 100,000 100,000 100,000 100,000 Total costs 810,000 1,355,000 585,000 1,020,000 Net income (310,000) 1,145,000 (185,000) 80,000 Factory rent and executive costs are split evenly across the four branches and cannot be avoided if a branch is closed. All other costs and revenues are avoidable if a branch is closed. Should we close Captain? Should we close General? You run a business with four branches. Here are the branches' performance figures. Captain Corporal General Sergeant Revenue 500,000 2,500,000 400,000 1,100,000 Variable costs 450,000 1,000,000 250,000 660,000 Fixed costs Factory rent 200,000 200,000 200,000 200,000 General admin 60,000 55,000 35,000 60,000 Executive costs 100,000 100,000 100,000 100,000 Total costs 810,000 1,355,000 585,000 1,020,000 Net income (310,000) 1,145,000 (185,000) 80,000 Factory rent and executive costs are split evenly across the four branches and cannot be avoided if a branch is closed. All other costs and revenues are avoidable if a branch is closed. Should we close Captain? Should we close General?Explanation / Answer
The factory rent and executive costs are unavoidable expense since they being fixed expense, so even if a branch is closed, these expenses would be continued.
In case of Captain Branch the loss is $310000 and the fixed costs are (Factory Rent - $200000 + Executive costs - $100000 = $ 300000). If the company closes the captain branch there would be savings of $ 310000 - $300000 = $ 10000. Hence, company should close the captain branch.
In case of General branch the loss is $ 185000 and the fixed costs are (Factory Rent - $ 200000 + executive costs - $ 100000 = $ 300000). If the company closes the branch the company would face expense of $ 300000 which is more than the loss of $ 185000. Hence, the company should not close the general branch.
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