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.

Compute Radar’s additional income (ignore taxes) if it accepts this order.

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Homework Answers

Answer #1

Answer 1:

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)

Answer 2:

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].

Answer 3:

Additional Income = $ 60,250

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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