Department A has a gross profit of $20,000,direct departmental expenses of $6,400 and allocated expenses of $19,000 giving a net loss of $5,400.What would be the effect on the total organisation's profit if Department A was closed?

Question

Quizplus · Accepted Answer

If Department A is closed, the direct departmental expenses of $6,400 will no longer exist, but the allocated expenses of $19,000 will still be incurred by the organization. Therefore, the total expense reduction would be $6,400, which would lead to an increase in the organization's profit by $5,400 ($20,000 gross profit minus $19,000 allocated expenses after the closure of Department A). However, since Department A currently has a net loss of $5,400, closing it would remove this loss, resulting in a total decrease in profit of $13,600 ($5,400 loss eliminated plus $5,400 profit increase from expense reduction).

Department a Has a Gross Profit of $20,000,direct Departmental Expenses