9 00 points value: 1.00 points A guitar manufacturer is considering eliminating

Question

9 00 points value: 1.00 points A guitar manufacturer is considering eliminating its electric guitar division because its are higher than its $87,890 sales. The company reports the following expenses for this division eliminating its electric guitar division because its $94,240 expenses Avoidable Expenses Unavoidable Expenses Cost of goods sold Direct expenses Indirect expenses Service department costs $63,500 11,750 560 1,800 1,850 2,050 2,730 Should the division be eliminated? Electric Guitar Division is: Sales Expenses: Kept Eliminated Total expenses Net income (loss) Revenues from electric guitar division Avoidable expenses Revenues are greater than (less than) avoidable expenses by

Explanation / Answer

1

To make a decision whether the guitar division should be eliminated or not, unavoidable expenses should not be taken into account as these expenses will be incurred whether the division is eliminate or not.

So, these expenses are sunk cost for making the decision to eliminate the division or not.

From the above calculation we could see that that it can avoid $ 87610 expenses if it eliminates the electric guitar division. But, eliminating it will cause to lose $ 280 of income

So it should not eliminate the devision

2

Rory Company

Amount in $ Amount in $ Sales 87890 Less: Avoidable Expenses Cost of goods sold 63500 Direct expenses 11750 Indirect expenses 560 Service department costs 11800 Total Expenses 87610 Income 280

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