River Rock has three departments. Data for year 2014 is provided below: DEPT A D
ID: 2445883 • Letter: R
Question
River Rock has three departments. Data for year 2014 is provided below:
DEPT A
DEPT B
DEPT C
Sales
$2,000
$1,000
$400
Variable expenses
640
260
170
Fixed expenses:
Unavoidable
460
260
60
Avoidable
580
520
270
1) Calculate the operating income of the company.
2) Calculate the contribution margin and operating income of each department.
3) Should any department(s) be eliminated? Which one(s) and why?
DEPT A
DEPT B
DEPT C
Sales
$2,000
$1,000
$400
Variable expenses
640
260
170
Fixed expenses:
Unavoidable
460
260
60
Avoidable
580
520
270
Explanation / Answer
Calculation of the Operating Income of the company DeptA Dept B Dept C Total Sales 2000 1000 400 3400 Less: Variable Expenses 640 260 170 1070 Contribution Margin 1360 740 230 2330 Less: Fixed Expenses Unavoidable -460 -260 -60 -780 Avoidable -580 -520 -270 -1370 Net Income 320 -40 -100 180 Yes, Department C should be Eliminated because it is having more avoidable fixed cost than its contribution margin If it is eliminated the profit would increase
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