Memorandum: Write a memo based on the following plan
Write a memo based on the following plan:
At the end of each fiscal year, it is important to assess the overall profitability of the company and the individual contribution to operating income from each of the company’s division. We are fortunate that all but one of the company’s operating divisions are reporting profits and contributing well to overall operating income.
Direction from the CEO and board of directors specifies that each of the firm’s divisions should provide a positive contribution to operating income. Decisions should be made with complete objectivity. Unless there is a qualitative reason to retain a segment that is not contributing positive operating income, the segment should be eliminated.
The Denver Division’s bottom line shows negative numbers. However, sometimes allocated and unavoidable fixed costs create an incorrect picture of what a segment actually contributes to overall company operating profits. In order to be completely sure that the Denver Division is not contributing a hidden positive operating income, I should remove all unavoidable fixed costs. . While we would all prefer the continuance of this division, the overall computation shows that the Denver Division is causing a reduction of $27,800 in company operating profits. If the $27,800 is eliminated, profits will incrase a striking 45.6% of current operating income.
Serious consideration should be given to closing the Denver Division. Qualitative factors and possibility of income improvement should be considered before making the final decision; however, in the absence of any reason not to close Denver, it should likely be eliminated.