Question 2 (46 marks) Part A (8 marks) XYZ Inc. has three divisions. Top management is concerned about the performance of Divisions I and II and are considering closing them. They have asked you to prepare an analysis to help assist them in making this important decision. Division I Division II Division III XYZ Total Sales $100,000 $200,000 $300,000 $600,000 Variable costs 70,000 120,000 205,000 395,000 Contribution margin 30,000 80,000 95,000 205,000 Fixed costs 50,000 95,000 20,000 165,000 Net profit (loss) ($20,000) ($15,000) $75,000 $40,000 You determine that if Division I is closed 65% of the fixed costs in that division would be avoided. If Division II is closed 10% of the fixed costs in that division would be avoided. Required a) What is the effect on total profits of XYZ if Division I is closed? (Show all your calculations) b) Should Division I be closed? c) What is the effect on total profits of XYZ if Division II is closed? (Show all your calculations)
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The contribution margin of Division I is $30,000. So, the effect on total profits of XYZ if Division I is closed would be the difference between the contribution margin and the avoided fixed costs, which is $30,000 - $32,500 = -$2,500. This means that the total Show more…
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