Valley Inc. has three divisions, Almond, Grover and Oak. Following is the income
ID: 2559992 • Letter: V
Question
Valley Inc. has three divisions, Almond, Grover and Oak. Following is the income statement for the previous year Almond Grover Oak Total S 492,000 274,500 229000 $ 995,500 Sales Variable Costs Contribution Margin Fixed Costs Profit Margin 24,800 100,000 403,800 129,000 591.700 274,000167250 105,750547,000 179,000 313,000 149,700 $ 39.000 $ (17.550) $ 23.250 $ 44.700 Of the fixed costs, $315,000 is for corporate costs and is allocated equally to the three divisions a. How much does Grover Division have in direct fixed costs? Fixed Costs b. What is Grover Division's segment margin? egment MarginExplanation / Answer
Answer a
Direct fixed cost are those fixed cost which are directly & solely attibutable to a particular segment or division
Grover division direct fixed cost = $167,250 - ($315,000 / 3) = $62,250
Answer b) Segment Profit does not include common fixed cost
Grover division segment margin = Contribution margin - direct fixed cost
= $149,700 - $62,250 = $87,450
Answer c
Note : Since nothing is given in question we assume that direct fixed cost is unaviodable cost . Common fixed is anyways a unavoidable cost . Unavaidable cost means the compnany will incure the fixed cost associated with the segment even if the segment or the division is dropperd.
In the present case if valley drop Grover division thanthere will be no contributionfrom that division but the total fixed cost of the company will remain same thus will decrease the overall profit margin of the company by the amount of contribution eliminated ie $149,700
Valley's profit margin if Grover Division is dropped = $44,700 - $149,700 = ($105,000)
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