Q3) DSQ Company Ltd, a diversified company, has three divisions, cement, fertilizers and textiles. The summary of the company’s profit is given below :
(Rs/Crore)
|
| Cement | Fertilizer | Textiles | Total |
| Sales | 20.0 | 12.0 | 18.0 | 50.0 |
| Less : Variable Cost | 8.0 | 9.6 | 5.4 | 23.0 |
| Contribution | 12.0 | 2.4 | 12.6 | 27.0 |
| Less : Fixed Cost (allocated to divisions in proportion to volumes of Sales) | 8.0 | 4.8 | 7.2 | 20.0 |
| Profit (Loss) | 4.0 | (2.4) | 5.4 | 7.0 |
After allocating the company’s fixed overheads to products the Fertilizers, division incurs a loss of Rs 2.4 crore. Should the company drop this division?
Current Statement of Profit/Loss
Rs (in Crores) | ||||
Particulars | Cement | Fertilizer | Textiles | Total |
Sales | 20 | 12 | 18 | 50 |
Less: Variable Costs | (8) | (9.6) | (5.4) | 23 |
Contribution | 12 | 2.4 | 12.6 | 27 |
Less: Fixed Costs (8 + 4.8 + 7.2) |
|
|
| (20) |
Profit/Loss |
|
|
| 7 |
|
| |||
Statement of Profit/Loss after dropping the Division of Fertilizer
Rs (in Crores) | |||
Particulars | Cement | Textiles | Total |
Sales | 20 | 18 | 38 |
Less: Variable Costs | (8) | (5.4) | (13.4) |
Contribution | 12 | 12.6 | 24.6 |
Less: Fixed Costs* |
|
| (20) |
Profit/Loss |
|
| 4.6 |
|
|
|
|
* Fixed Cost is always remains the same and the company have to incur this cost even if it opts to drop the division of Fertilizer.
From the above two statements, it can be clearly seen that after dropping the Division of Fertilizer, the profit of the company has reduced to 4.6 crores. Therefore, it is advisable for the company to continue with the division of fertilizer because by doing so it earns the higher profit of 7 crores.