Question 1
Unfocused Books is a discount retail bookshop that has three departments: non-fiction, fiction and children's books. Sales and cost of sales for every department are shown below. In addition, every department has its own fixed costs for staffing and takes a one-third share of rental and management costs for the Bookshop as a whole.
|
|
Fiction
|
Non-Fiction
|
Children's
|
|
Sales
|
250,000
|
100,000
|
75,000
|
|
Cost of sales
|
45%
|
50%
|
55%
|
|
Departmental costs
|
50,000
|
35,000
|
35,000
|
|
Shared fixed costs
|
30,000
|
30,000
|
30,000
|
What is the profitability of Unfocused Books' three departments and what recommendations would you make to the owners?
Question 2
Greentown Industries sells its transport services at a range of prices to five different customer groups. The company has fixed costs of £150,000 per year. The average variable costs for each transport service, irrespective of customer group, is £7. The Table below displays the prices charged to each customer group and the quantity of transport services that are currently sold at that price.
|
Customer group
|
Selling price
|
Quantity
|
|
Multinational
|
£19
|
13,000
|
|
Corporate
|
£20
|
12,500
|
|
Small business
|
£21
|
12,000
|
|
Government
|
£22
|
11,000
|
|
Private
|
£23
|
10,000
|
a. If the average selling price is £21, determine the breakeven point in quantity and money terms and draw a rough sketch of a cost-volume-profit (CVP) graph that shows the relationships between the elements of CVP.
b. Ignoring any market demand or capacity limitations, evaluate the optimum selling price for Greentown Industries and identify which customer group is most profitable.
Use the subsequent information to answer part (c) Consider that the maximum market demand for each customer group is 20,000 transport services at the same price as currently charged.
Also consider that Greentown's capacity limitation is 60,000 transport services.
c. Based on the evaluation of optimum selling prices in (b) above but with the capacity and demand assumptions taken into consideration, evaluate the maximum profits that Greentown can earn and the customer mix and quantity by which that profit will be achieved.
Question 3 General Consulting plc has four divisions, whose summary profit reports are given below:
|
(in £'000)
|
I.T.
|
Finance
|
Strategy
|
M&A
|
Total
|
|
Income
|
1,200
|
1,700
|
900
|
1,500
|
5,300
|
|
Variable staff costs
|
600
|
900
|
350
|
600
|
2,450
|
|
Contribution margin
|
600
|
800
|
550
|
900
|
2,850
|
|
Fixed costs
|
471
|
885
|
804
|
490
|
2,650
|
|
Operating profit/(loss)
|
129
|
(85)
|
(254)
|
410
|
200
|
The senior partners are considering whether or not to continue with the Finance and Strategy consulting activities as these have consistently been loss-makers. The Chief Accountant has advised the senior partners that business-wide costs which are included in fixed costs total £1,200,000. Business-wide costs will continue irrespective of the closure of any division. Those costs are allocated to the four divisions in proportion to their income. The remaining fixed costs in each division are attributable to that division and cover the cost of staff whose expertise means that they will only work in that division. If a division is closed, these fixed costs could be avoidable.
a. Show the financial information in a more meaningful form, showing the contribution each division makes to total profitability
b. Ignoring any redundancy payments, advise the senior partners as to
- which, if any, divisions should be closed, and
- the likely profit, assuming constant sales, if those divisions were closed.
c. By re-presenting the financial information, Illustrate the consequences to remaining divisional profitability if any division is closed.