Question

Hot Doggy Dogg has three divisions. Revenues, variable costs, and fixed costs for each division are presented below. Hot Doggy Dogg is thinking of shutting down the Relish division, since it is unprofitable, and has been so for the past five years.

	Hot Dogs	Buns	Relish
Revenue	$7,500,000	5,200,000	$1,400,000
Variable Costs	750,000	1,000,000	820,000
Fixed Cost	4,200,000	2,300,000	750,000
Profit	$2,550,000	$1,900,000	$(170,000)

If the Relish division is shut down, all its fixed costs will be avoidable except $80,000 in allocated corporate costs. Also, hot dog and bun sales will decline by 1% if the Relish division is shut down, since some customers will not eat hot dogs if they cannot buy Hot Doggy Dogg’s relish.

Find the net benefit of the decision.

Answer 1

Solution:

Current Total Profit from all three divisions = $2,550,000 + $1,900,000 - $170,000 = $4,280,000

Determination of total profit of the company after shut down the Relish Division

	Hot Dogs	Buns	Relish (Shut Down)	Total
Revenue	$7,425,000	5,148,000	$0	$12,573,000
Variable Costs	742,500	990,000	0	$1,732,500
Fixed Cost	4,200,000	2,300,000	80,000	$6,580,000
Profit	$2,482,500	$1,858,000	($80,000)	$4,260,500

The total profit of the company after shut down the Relish Division will be $4,260,500

The net loss to the company from shut down of Relish Division = Profit before shut down – Profit after shut down

= $4,280,000 - $4,260,500

= $19,500

Net Loss = $19,500

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