Chapter 6, Problem 29PSA

a.

To determine

Whether to eliminate Division B.

Explanation of Solution

Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.

Outsourcing: It can be termed as conveying all or part of an activity to a supplier or a provider. While outsourcing was initially limited to fundamental activities, it as of now invades the administration of numerous organizations.

Opportunity cost: Opportunity cost is the forfeit of certain benefits such as cost savings, incomes, which is surrendered by not picking an option. Opportunity costs are applicable in decisions where the acknowledgment of one option disqualifies the likelihood of selecting different alternatives.

Determine the contribution to profit

$\begin{array}{c}Contibutionto\mathrm{Pr}ofit=\left[\begin{array}{l}Sales\mathrm{Re}venue-Manufacturing\mathrm{Cos}ts-\\ \mathrm{Re}ntonFacility-UnitLevelSelling\&Ad\min \mathrm{Cos}ts-\\ DivisionLevelSelling\&Ad\min \mathrm{Cos}ts\end{array}\right]\\ =\left[\begin{array}{l}\$300,000-\$200,000-\$75,000-\$14,000-\\ \$20,000\end{array}\right]\\ =-\$9,000\end{array}$

Therefore the contribution to profit is-$9,000.

Conclusion

From the results obtained above, the contribution to profit is negative at-$9,000. Hence the Division B should be eliminated.

Therefore Division B should be eliminated.

To determine

Preparing the companywide income statement before and after eliminating Division B.

Explanation of Solution

The companywide income statement before eliminating Division B is as follows:

Table(1)

(Refer excel for workings)

The companywide income statement after eliminating Division B is as follows:

Table (2)

(Refer excel for workings)

b.

To determine

Whether the recommendations in Requirement A changes if the units increase to 30,000 units by comparing differential avoidable cost and revenue for Division B.

Explanation of Solution

Initiate by calculating the cost price per unit and the selling per unit that will change in respect to the quantity of units produced and traded. The result is divided with the total cost for respective group by 20,000 units to get cost per unit. The headquarters facility-level costs are not considered from the investigation since these costs are not avoidable.

Determine the selling price per unit

$\begin{array}{c}SellingPriceperunit=\left[\frac{Sales}{NumberofUnits}\right]\\ =\left[\frac{\$300,000}{20,000}\right]\\ =\$15\end{array}$

Therefore the selling price per unit is $15.

Determine the unit level manufacturing costs

$\begin{array}{c}UnitLevelManufacturing\mathrm{Cos}ts=\left[\frac{Actual\mathrm{Cos}ts}{NumberofUnits}\right]\\ =\left[\frac{\$200,000}{20,000}\right]\\ =\$10\end{array}$

Therefore the unit level manufacturing costs is $10.

Determine the unit level selling and administrative costs

$\begin{array}{c}UnitLevelAd\min istrative\mathrm{Cos}ts=\left[\frac{Actual\mathrm{Cos}ts}{NumberofUnits}\right]\\ =\left[\frac{\$14,000}{20,000}\right]\\ =\$0.70\end{array}$

Therefore the unit level selling and administrative costs is $0.70.

Determine the contribution to profit

The comparison between differential revenue and avoidable cost is determined in the below step.

$\begin{array}{c}Contibutionto\mathrm{Pr}ofit=\left[\begin{array}{l}Sales-Manufacturing\mathrm{Cos}ts-\\ \mathrm{Re}ntonFacility-UnitLevelSelling\&Ad\min \mathrm{Cos}ts-\\ DivisionLevelSelling\&Ad\min \mathrm{Cos}ts\end{array}\right]\\ =\left[\begin{array}{l}\left(\$15\times 30,000\right)-\left(\$10\times 30,000\right)-\$75,000-\\ \left(\$0.70\times 30,000\right)-\$20,000\end{array}\right]\\ =\left[\$450,000-\$300,000-\$75,000-\$21,000-\$20,000\right]\\ =\$34,000\end{array}$

Therefore the contribution to profit is $34,000.

Conclusion

From the results obtained above, the profit contributed by Division B would be 30,000 units. Hence the division should not be eliminated. Additionally, it is vital to contemplate development prospective before choosing to eliminate a segment.

Therefore Division B should not be eliminated.

c.

To determine

Whether to operate the division with volume of 30,000 units or it should be closed.

Explanation of Solution

Determine the profit or loss of the division

$\begin{array}{c}\mathrm{Pr}ofitorLoss=\left[\mathrm{Pr}ofit-Opportunity\mathrm{Cos}t\right]\\ =\left[\$34,000-\$85,000\right]\\ =-\$51,000\end{array}$

Therefore the loss of the division is -$51,000.

The reasons on whether to operate the division with volume of 30,000 units or it should be closed is as follows:

• It is mentioned that Company LM is paying $75,000 to lease the manufacturing facility for Division B.
• The business could earn $85,000 ($160,000-$75,000) by subleasing the manufacturing facility.
• By operating the division, the organization is allowing up the chance to sublease the office.
• This is an opportunity cost that would be avoidable by eradicating Division B.
•  Consequently, it must be incorporated into the investigation. If the volume is 30,000 units Division B contributes $34,000 as profit.

Conclusion

When considering opportunity cost, the profit turns into a loss of $51,000. According to these conditions, Division B should be eliminated.

Therefore Division B should be eliminated.