A company has the following three divisions. Overall, the company is profitable but is concerned about the Hats Division. The Hats Division adds diversification of product lines but has an operating profit loss. The Board of Directors is very concerned about the loss as it is over 36% of total operating profit. A large part of the costs are sales persons costs, particularly variable commissions on sales. The company is unaware of how competitors pay commssions and the level of commissions. But the Board says the loss needs to be fixed and maybe the division should be closed. But under no circumstances should the total operating profits of the company be below $2,000. The financial forecast of all divisions follows.

1. Use quantitative analysis to assess whether the company should close the Hats Division. (13 marks)

1. 2. What is an important strategic consideration in making the above decision? (1 mark)

   

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Sales Cost of Goods Sold (COGS) Variable Fixed Total COGS Gross Profit Corporate Variable Expenses Corporate Fixed Expenses Opearting Profit Shoes 10,000 3,000 2,000 5,000 5,000 1,000 2,000 2,000 Shirts 5,000 1,500 1,000 2,500 2,500 500 1,000 1,000 Hats 2,500 750 500 1,250 1,250 1,250 800 800 Total 17,500 5,250 3,500 8,750 8,750 2,750 3,800 2,200 Sales Cost of Goods Sold (COGS) Variable Fixed Total COGS Gross Profit Corporate Variable Expenses Corporate Fixed Expenses Opearting Profit Shoes 10,000 3,000 2,000 5,000 5,000 1,000 2,000 2,000 Shirts 5,000 1,500 1,000 2,500 2,500 500 1,000 1,000 Hats 2,500 750 500 1,250 1,250 1,250 800 800 Total 17,500 5,250 3,500 8,750 8,750 2,750 3,800 2,200

Answer rating: 100% (QA)

Use quantitative analysis to assess whether the company should close the Hats Division 13 marks Quan... View the full answer