Also determine which costs are relative costs and which are not for the company

Question

Also determine which costs are relative costs and which are not for the company

Each branch (division) operates its own facility The administative offices are located in a separate building and the Administrative-Facility Level Costs are allocated among X, Y and . The branch income statements are presented for the year 20X8; Branch (Division) Z has experienced a Net Loss Branch Z has suffered losses in recent years and the company expects Z to continue to operate at a loss Here are the data: (Note: no formulas have been used to present the data.) Division Division Division 2,000,000 1,600,0001,710,000 Sales Less: Cost of Goods Sold :Unit-level Manufacturing Costs (1,100,000)(580,000) (900,000) Rent on Manufacturing 220,000)(450,000 240,000 660,000 800,000360,000 (60,000)(45,000)(150,000) (80,000) 380,000 550,000 (110,000) Facility Gross Margin Less: Operatingxenses Unit-Level Selling and Admin. Expenses Division-Level Fixed Selling and Admin. Expenses(140,000 Administrative Facility-Level Costs (125,000) (80,000) (240,000) (80,000) Net Income (loss) a. Based on the information above, recommend whether Division Z should be eliminated Support your answer by preparing companywide income statements- one with Division Z and one without Division Z. Use the Excel spreadsheet we have included in the folder with the instructions b. During 20X8, Division Z produced and sold 30,000 units of product. Would your recommendation in part a change if sales and production increase to 45,000 units in 2009? Support your answer by comparing differential revenue and avoidable cost for Division Z, assuming that 45,000 units are sold Use the same Excel spreadsheet as you used in part a (above C. Suppose that the company could sublease Division Z's manufacturing facility for $910,000. Would you operate the division at a production and sales volume of 45,000 units or would you sublease? Support your answer with appropriate computations using Excel! (Again, use the same Excel spreadsheet as used in parts a & b above.)

Explanation / Answer

Solution a:

As there is increase in net income by $30,000 on elimination of division Z, therefore division Z should be eliminated.

Solution b:

As eliminating division Z will result in to overall decrease in net income by $300,000, therefore division Z should not be eliminated.

Solution c:

As elimination of division z will result in increase in income by $610,000 therefore divisiion Z should be eliminated.

Incremental Analysis - Continue Division Z (Alt 1) or Eliminate (Alt 2) Division Z Particulars Continue Division Z (Alt 1) Eliminate Division Z (Alt 2) Net Income Increase (Decrease) - Alt 2 Amount Amount Sales $5,310,000.00 $3,600,000.00 -$1,710,000.00 Variable cost: Unit level manufacturing cost -$2,580,000.00 -$1,680,000.00 $900,000.00 Unit level selling and administrative expenses -$255,000.00 -$105,000.00 $150,000.00 Contribution $2,475,000.00 $1,815,000.00 -$660,000.00 Rent on manufacturing facility (Avoidable) -$910,000.00 -$460,000.00 $450,000.00 Division level fixed selling and admin expenses -$505,000.00 -$265,000.00 $240,000.00 Administrative facility level cost -$240,000.00 -$240,000.00 $0.00 Net Income $820,000.00 $850,000.00 $30,000.00

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