Profitability & Reporting Assignment

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Amish Patel                                                                                                             PAR

Upal Banerjeee

Profitability & Reporting Assignment

Task 1a)

From referring to and using the memo from Bob Harris and the figures in Appendix 1, I will be calculating the total profit. Appendix 1 is illustrated below.

Total Profit = Sum of Product 1 Profit + Sum of Product 2 Profit + Sum of Product 3 Profit + Sum of Product 4 Profit = £9,000 + £11,250 + £28,500 + £-7000 = £41, 750.

Task 1b)

The Saved Costs are going to be the Variable Costs. The Variable Costs from using the table above are Labour (£40,000) & Materials (£40,000). Labour costs will be saved because if division 4 was to close then Spark Ltd will not need any labour to manufacture product 4 and so no funds will need to be spent on purchasing materials to fabricate that respective product in that particular department.

Subsequently, the company will save £80,000. This was determined by adding up the VC’s and then deducting it from the table.

The Incurred Costs which are still going to take place are the Fixed Costs. Fixed costs are those costs which remain congruent regardless of changes in the level of activity. In the case of Spark Ltd the fixed elements of costs can be identified as being Administration (£6,000), Finance (£7,000) and Personnel (£10,000). By totalling up these fixed costs it is evident that the company are going to incur £23,000.

Task 1c)

Based on my cost analysis in the previous question, I will now establish the change in total profit if division 4 was to close. To do this I will have to consider contribution. Contribution is calculated by taking away the selling price per unit from the variable costs. In the case of division 4, the contribution will be worked out as follows:

Using the illustration of appendix 1 above, we can see that it is evident that D4 generates a turnover of £96,000. If this added to the turnover of the other three divisions, the total turnover of the firm sums up to being £343,000 and the profit of the entire company is £41,750.

If Spark Ltd considers the closure of Division 4, then it becomes indicative that the business’s total profit will decrease. This was worked by first calculating the total profits of the company which is £41,750 and then deducting the total profits of division 1 to 3 away from that figure leaving (£23,750). This means that removing Division 4 will cost or give the company a shortfall of £18,000.

Task 1d)


TO: Bob Harris

From: Jane Jones

Date: 01/10/2004

SUBJECT: Division 4

Having analysed the financial information and prepared necessary calculations, I have come to the conclusion that you should not close division 4. This is because my calculations indicate that if division 4 is removed then you will have a deficit of £18,000. Having established that, the rule of thumb to bear in mind is that Division 4 is still providing you with a positive contribution of £23,750 with regards to the total turnover of Spark Ltd and so eradicating that respective division will reduce the business’s total profits. As you can see after examining the implications towards the closure of division 4, it would be detrimental to close down that certain division with regards to the financial stability of the business as it yields in £18,000 of the business’s total profit. Therefore from a financial perspective, the foreclosure of division 4 cannot be monetarily viable.

Kind Regards,

Jane Jones

Task 1e)

The notion of contribution is useful in decision-making scenarios as you have seen in the preceding question. However having said that, there are circumstances when it would be level-headed to adjust that theory.

Such situations that need to be taken into account are limiting factors towards the business. In the case of Spark Ltd they could also be placed at a huge disadvantage – they could be limited in their activities on the grounds of social factors.

For example, in the occurrence that Spark Ltd was to close down division 4, redundancies and unemployment may take place which is most likely to lead to a spiral of decline in terms of unemployment in the local neighbouring vicinity. This could lead to a potential decline in sales because local people will lose their goodwill and faith towards the company.

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As a result of that, things such as insecurity may transpire within the company itself and the local area because those workers which still remain employed by the organisation may feel as though they will be next on the line to get laid off. As a result, this may stir up a lot of tension and demotivate staff within the corporate culture of Spark Ltd.

Other state of affairs which need to be taken into account due to the possible closure of division 4, are that Spark Ltd may well lose some of their clients. Customers may ...

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