Fusion Metals Company is considering the elimination of its Packaging Department

Question

Fusion Metals Company is considering the elimination of its Packaging Department. Management has received an offer from an outside firm to supply all Fusion's packaging needs. To help her in making the decision, Fusion's president has asked the controller for an analysis of the cost of running Fusion's Packaging Department. Included in that analysis is $9,100 of rent, which represents the Packaging Department's allocation of the rent on Fusion's factory building. If the Packaging Department is eliminated, the space it used will be converted to storage space. Currently Fusion rents storage space in a nearby warehouse for $11,000 per year. The warehouse rental would no longer be necessary if the Packaging Department were eliminated Required: 1 Identify the relevance of each of the figures given in the exercise with regard to the department-closing decision 2. What type of cost is the $11,000 warehouse rental, from the viewpoint of the costs of the Packaging Department? Complete this question by entering your answers in the tabs below Required 1 Required 2 Identify the relevance of each of the figures given in the exercise with regard to the department-closing decision Allocation of rent on factory building Rental of storage space in warehouse Required 1 Required 2>

Explanation / Answer

- $9,100 of rent is an example of avoidable fixed cost which will be eliminated once packaging department is closed. There will be no further allocation to factory rent building.

- If the packaging department is closed, it can be converted into storage space. By this, company can save $11,000. Hence $11,000 is opportunity cost for Packaging department

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