Question

# 1. A guitar manufacturer is considering eliminating its electric guitar division because its \$86,110 expenses are...

1.

A guitar manufacturer is considering eliminating its electric guitar division because its \$86,110 expenses are higher than its \$81,130 sales. The company reports the following expenses for this division.

 Avoidable Expenses Unavoidable Expenses Cost of goods sold \$ 58,500 Direct expenses 11,750 \$ 1,450 Indirect expenses 980 2,200 Service department costs 9,600 1,630

Should the division be eliminated? (Any loss amount should be indicated with minus sign.)

2.

A division of a large company reports the information shown below for a recent year. Variable costs and direct fixed costs are avoidable, and 50% of the indirect fixed costs are avoidable. Based on this information, should the division be eliminated?

 Sales \$ 255,000 Variable costs 146,000 Fixed costs Direct 39,000 Indirect 52,000 Operating loss \$ (18,000 )

1-a.
Compare the amounts of total revenues and total avoidable expenses.
1-b. Based on this information, should the division be eliminated?

3.

Radar Company sells bikes for \$480 each. The company currently sells 4,400 bikes per year and could make as many as 4,790 bikes per year. The bikes cost \$255 each to make: \$165 in variable costs per bike and \$90 of fixed costs per bike. Radar received an offer from a potential customer who wants to buy 390 bikes for \$440 each. Incremental fixed costs to make this order are \$47,000. No other costs will change if this order is accepted.

The department should NOT be eliminated as it will increase losses by \$ 300

Explanation:

Net benefit of department = Sales (-) Avoidable expenses

= 81,130 (-) 58,500 (-) 11,750 (-) 980 (-) 9,600

= \$ 81,130 (-) 80,830

= \$ (300)

1-a.

Total revenues = \$ 255,000

Total avoidable expenses = \$ 146,000 + \$ 39,000 + \$ 26,000 = \$ 211,000

1-b:

Department should NOT be eliminated [255,000 (-) 211,000 = 44,000 benefit if department is continued].

Explanation:

Incremental benefit = Incremental revenues (-) Incremental costs

= [390 * 440] (-) [390 * 165] (-) 47,000

= 171,600 (-) 64,350 (-) 47,000

= \$ 60,250

In case of any doubt or clarification, feel free to come back via comments.

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