Question

1. The Flower Department at the big Department Store is being considered for closure. The following information relates to flower department activity: Sales revenue $350,000 Variable costs: Cost of goods sold 280,000 Sales commissions 30,000 Fixed operating costs 90,000 If 70% of the fixed operating costs are avoidable, should the flower department be closed: yes or no? and what is the impact on the net income of the big Department Store if the flower department is closed

Answer 1

This concept is based on relevant costing. In case of decision to close or not, avoidable costs play important role.

Sales revenue	350,000
Less: variable costs
Cost of goods sold	280,000
Sales commissions	30,000
Contribution	40,000
Less: avoidable fixed operating costs (90,000*70%)	63,000
Operating profit before avoidable costs (loss)	(23,000)
Less: avoidable fixed operating costs (90,000-63,000)	27,000
Operating profit	(50,000)

In the given case, after taking avoidable fixed costs out of picture, the flower department is making loss of still $ 23,000. Hence, it shall be closed. Hence, the department would be better off by $ 23,000 with avoidable fixed costs.