Question

Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing costs total $54,000 per ton, one-fourth of which is allocated to product X15. Six thousand three hundred units of product X15 are produced from each ton of clypton. The units can either be sold at the split-off point for $17 each, or processed further at a total cost of $8,700 and then sold for $20 each.

Required:

1. What is the financial advantage (disadvantage) of further processing product X15?

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Bed & Bath, a retailing company, has two departments—Hardware and Linens. The company’s most recent monthly contribution format income statement follows:

				Department
	Total			Hardware			Linens
Sales	$	4,060,000		$	3,000,000		$	1,060,000
Variable expenses		1,403,000			986,000			417,000
Contribution margin		2,657,000			2,014,000			643,000
Fixed expenses		2,280,000			1,410,000			870,000
Net operating income (loss)	$	377,000		$	604,000		$	(227,000	)

A study indicates that $371,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 18% decrease in the sales of the Hardware Department.

Required:

What is the financial advantage (disadvantage) of discontinuing the Linens Department?

Answer 1

Computation of Loss to company if the Linens Department is dropped

Particular	Amount ($)
Contribution margin lost of the Linens Department	643,000
Contribution margin lost of Hardware Department.($2,014,000 * 18 %)	362,520
Total Loss of contribution margin to the company	1,005,520
Less : Saving in Fixed Cost ($870,000 - $371,000)	(499,000)
Net Loss to company if the Linens Department is dropped	$506,520

Conclusion : If  Bed & Bath continue with Linens Department , it will incure net operating loss of $227,000 & if it drop the Linens Department , the loss for the company incresed to $506,520 . Thus loss for the company will increse by $279,520 ($506,520 - $227,000) if the Linens Department is dropped .