Question

Part 1.

ABC Manufacturing is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years. The company’s departmental income statements show the following:

	A	Z	Total
Sales	$700,000	$175,000	$875,000
Cost of goods sold	461,300	125,100	586,400
Gross profit	238,700	49,900	288,600
Operating expenses
Direct expenses
Advertising	27,000	3,000	30,000
Store supplies used	5,600	1,400	7,000
Depreciation – store equipment	14,000	7,000	21,000
Total direct expenses	46,000	11,400	58,000
Allocated expenses
Sales salaries	70,200	23,400	93,600
Rent expense	22,080	5,520	27,600
Bad debts expense	21,000	4,000	25,000
Office salary	20,800	5,200	26,000
Insurance expense	4,200	1,400	5,600
Miscellaneous office expense	1,700	2,500	4,200
Total allocated expenses	139,980	42,020	182,000
Total expenses	186,580	53,420	240,000
Net income (loss)	$ 52,120	$ (3,520)	$ 48,600

The plant controller provided the following additional information:

• The company has one office worker who earns $500 per week, or $26,000 per years, and four salesclerks who each earns $450 per week, or $23,400 per year for each salesclerk.
• The full salaries of three salesclerks are charged to Department A. The full salary of one salesclerk is charged to Department Z.
• Eliminating Department Z would avoid the sales salaries but not the office salary currently allocated to it.
• The store building is rented under a long-term lease that cannot be changed. Therefore, Department A will use the space and equipment currently utilized by Department Z.
• Closing Department Z will eliminated its expenses for advertising, bad debts, and store supplies; 65% of the insurance expense allocated to it to cover its merchandise inventory; and 30% of the miscellaneous office expenses presently allocated to it.

Required

Should ABC Manufacturing eliminate product Z? Show detailed calculations to support your decision.

Part 2

Wally World manufactures cross country skis. Its cost of manufacturing 5,000 bindings is as follows:

Direct materials	$44,000
Direct labor	8,500
Variable overhead	5,000
Fixed overhead	16,000
Total manufacturing costs for 5,000 bindings	$73,500

Wally World can purchase bindings from another manufacturer for $11.00 each. They would pay an additional $1.25 per unit to have the bindings shipped to its manufacturing plant. They would add their logo to each binding for an additional $0.70 per unit.   If Wally World purchases the bindings they can avoid fixed overhead costs of $7,500.

Required

Should Wally World continue to manufacture the bindings or purchase them from the other manufacturer? Show detailed calculations to support your decision.

Answer 1

Answer 1

ABC Manufacturing should not eliminate product Z because there is Incremental loss of $ 15,440.

Explanation:

If the company closes the product, its unavoidable fixed costs will still be incurred. Hence, they are relevant for decision making.

	Z
Sales	$      175,000
Cost of goods sold	$      125,100
Gross profit	$         49,900
Operating expenses
Direct expenses
Advertising	$           3,000
Store supplies used	$           1,400
Depreciation – store equipment	$                 -
Total direct expenses	$           4,400
Allocated expenses
Sales salaries	$         23,400
Rent expense	$                 -
Bad debts expense	$           4,000
Office salary	$                 -
Insurance expense	$              910
Miscellaneous office expense	$           1,750
Total allocated expenses	$         30,060
Total expenses	$         34,460
Net income (loss)	$         15,440

Note:

• Depreciation, rent, and office salary will still be incurred. So, they are irrelevant.
• Insurance of $ 910 ($ 1,400*0.65) is considered. Miscellaneous office expense of $ 1750 (2500*0.7) is considered.

** As per Chegg policy, only the first question is answered. Please post the other question as a separate question**

In case of any doubt, please comment.