Power Inc. has two divisions, Windsor and Ridge. Following is the income statement for the past month: What would Power's profit margin be if the Windsor division was dropped and all fixed costs are unavoidable?
A) $0
B) $80,000 loss
C) $42,00 profit
D) $80,000 profit

Question

Power Inc. has two divisions, Windsor and Ridge. Following is the income statement for the past month:  What would Power's profit margin be if the Windsor division was dropped and all fixed costs are unavoidable?
A) $0 
B) $80,000 loss 
C) $42,00 profit 
D) $80,000 profit

Quizplus · Accepted Answer

If the Windsor division is dropped, the total revenue will decrease to $200,000 and the variable costs will decrease to $120,000 ($80,000 + $40,000), leaving only the unavoidable fixed costs of $200,000.

Total Costs = Variable Costs + Fixed Costs

Total Costs = $120,000 + $200,000

Total Costs = $320,000

Total Revenue = $200,000

Profit = Total Revenue – Total Costs

Profit = $200,000 - $320,000

Profit = -$120,000

Therefore, the company will suffer a loss of $120,000, and the profit margin will be negative. Hence, the correct choice is B.

Power Inc Has Two Divisions, Windsor and Ridge