1. Kentucky Distributors has two divisions – Northern and Southern. The division
ID: 2497147 • Letter: 1
Question
1. Kentucky Distributors has two divisions – Northern and Southern. The divisions have provided the following financial information:
Kentucky’s executives are considering the elimination of the Northern division. If the division is eliminated, the common fixed costs will remain unchanged. Given these data, should the Northern division be eliminated? Why?
2.
Logan Corporation reported the following operating data for the past year:
Required:
Calculate Logan’s margin.
Calculate Logan’s asset turnover.
Calculate Logan’s ROI.
Northern Southern Sales $150,000 $210,000 Variable costs 95,000 110,000 Common fixed costs 65,000 75,000 Operating income ($ 10,000) $ 25,000Explanation / Answer
1) Statement showing computations Particulars Division is not eliminated Division is eliminated Sales 360,000.00 210,000.00 Variable Costs 205,000.00 110,000.00 Contribution =Sales - VC 155,000.00 100,000.00 Fixed Costs 140,000.00 140,000.00 Income= Cont- FC 15,000.00 (40,000.00) No it should not be eliminated because overall profit will fall by $55,000{15000-(-40000)} This is because norther Division is generating contribution of 55,000 (150,000-95,000) Fixed Costs are common and are unaffected by continuance or discontinuance of Northern Division 2) Sales 400,000.00 Net operating income 20,000.00 Logan's Margin = 20,000/400,000(NOI/Sales) 5.0% Opening Assets 150,000.00 Closing Assets 170,000.00 Average Assets = (150,000 + 170,000)/2 160,000.00 Assets Turnover = Sales/Assets = 400,000/160,000 2.50 Logan's ROI = Margin * Turnover2.5*5% 12.50%
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