Business Performance Analysis: Divisions Sales and Costs

How can the total contributions of a company's divisions be calculated?

Options:

a) By adding total variable costs to total sales

b) By subtracting total variable costs from total sales

c) By multiplying total variable costs with total sales

d) By dividing total variable costs by total sales

The total contributions of a company's divisions can be calculated by subtracting total variable costs from total sales.

Final answer:

The total contributions of a company's divisions can be calculated by subtracting total variable costs from total sales. Accounting profit is total revenue minus explicit costs, while economic profit is accounting profit minus implicit costs.

Explanation:

The performance of a company's divisions can be analyzed using business indices such as sales, variable costs, and contribution. Using the example given, the total sales for all divisions is $1840K.

Subtracting the total variable costs of $1220K from the total sales gives us the total contributions: $620K. Accounting profit can be calculated by subtracting explicit costs from total revenues.

For example, if total revenues are $1,000,000 and explicit costs are $600,000 + $150,000 + $200,000 = $950,000, the accounting profit would be $1,000,000 - $950,000 = $50,000.

Moreover, economic profit considers both explicit and implicit costs. So, assuming an implicit cost of $30,000, the economic profit would be calculated as: $50,000 - $30,000 = $20,000.