Each branch (division) operates its own facility. The administative offices are

Question

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 Z The branch income statements are presented for the year 20X8Branch (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 1,600,000 1,710,000 Sales Less: Cost of Goods Sold Unit-level Manufacturing Costs Rent on Manufacturing Facility 1,100,000)(580,000)900,000) 240 220 Gross Margin Less: Operating Expenses 660,000800,000 360,000 Unit-Level Selling and Admin. Expenses (60,000) 45,000)150,000) Division-Level Fixed Selling and Admin. Expenses140,000) (125,000)(240,000) Administrative Facility-Level Costs (80,000) (80,000) (80,000) Net Income (loss) 380,000550,000 (110,000 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 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.) Also determine which costs are relative costs and which are not for the company

Explanation / Answer

a. Company wide income statement: With Division Z: Division X Division Y Division Z Total Sales 2000000 1600000 1710000 5310000 Less: cost of goods sold Unit-level manufacturing costs 1100000 580000 900000 2580000 Rent on manufacturing facility 240000 220000 450000 910000 Gross margin 660000 800000 360000 1820000 Less: Operating expenses Unit-level selling and admin exp 60000 45000 150000 255000 Division-level fixed selling and admin exp 140000 125000 240000 505000 Administrative facility-level costs 80000 80000 80000 240000 Net income (loss) 380000 550000 -110000 820000 Without Division Z: Division X Division Y Total Sales 2000000 1600000 3600000 Less: cost of goods sold Unit-level manufacturing costs 1100000 580000 1680000 Rent on manufacturing facility 240000 220000 460000 Gross margin 660000 800000 1460000 Less: Operating expenses Unit-level selling and admin exp 60000 45000 105000 Division-level fixed selling and admin exp 140000 125000 265000 Administrative facility-level costs 120000 120000 240000 (240000 allocated between two divisions) Net income (loss) 340000 510000 850000 Division Z should be eliminated since the there is increase in net income by $30000 (850000-820000) if Division Z is dropped. b. Relavant facts of Division Z: Unit selling price=1710000/30000=$ 57 per unit Unit price of manufacturing facility=900000/30000=$ 30 per unit Unit price of selling and admin exp=105000/30000=$ 3.5 per unit differential income statement: Division Z Differential income 30000 units 45000 units Sales 1710000 2565000 855000 (45000*57) Less; Unit level manufacturing cost 900000 1350000 450000 (45000*30) Unit-level selling and admin exp 150000 157500 7500 (45000*3.5) Net income 397500 Relavant costs: Unit level manufacturing cost Variable Unit-level selling and admin exp Variable Irrelavant costs: Rent on manufacturing facility Fixed Division-level fixed selling and admin exp Fixed Administrative facility-level costs Fixed Division Z should not be dropped since it produces an additional income of $ 397500. c. Revenue from subleasing 910000 Additional net income 397500 Additional revenue from sub-leasing 512500 Division Z should be eliminated since the there is increase in net income by $512500 due to sub-leasing.

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