2. Carmel Corporation is considering eliminating a department that has a contrib

Question

2. Carmel Corporation is considering eliminating a department that has a contribution margin of $70,000 and $140,000 in fixed costs. Of the fixed costs, S100,000 cannot be avoided. The effect of eliminating this department on Carmel's overall net operating income would be: A. an increase of S70,000. B. a decrease of $70,000 C. an increase of $30,000. D. a decrease of $30,000. Yosemite Corporation produces a part used in the manufacture of one of its products. The unit product cost is $26, computed as follows: 13. Direct materials $10 Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $26 An outside supplier has offered to provide the annual requirement of 5,000 of the parts for only $21 each. The company estimates that 75% of the fixed manufacturing overhead cost above could be eliminated if the parts are purchased from the outside supplier. Assume that direct labor is an avoidable cost in this decision. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be: A. $1 disadvantage B. $5 advantage C. $3 advantage D. $4 disadvantage

Explanation / Answer

Dear student, only one question is allowed at a time. I am answering the first question

Relevant costs are costs which can be avoided if the decision is not taken. Sunk costs are costs which cannot be avoided even if production is not done

So, out of $140,000 in fixed costs, $100,000 are sunk costs as they cannot be avoided

Current Net Operating Income

= Contribution – Fixed costs

= $70,000 - $140,000

= $(70,000)

If production is not done, Contribution will be 0 and Fixed costs will be equal to sunk costs which are unavoidable

So, Net Operating Income

= $0 - $100,000

= $(100,000)

So, Net Operating Income will decrease by $100,000 - $70,000

= $30,000

So, option D is the correct option

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.