Question

A guitar manufacturer is considering eliminating its electric guitar division because its $88,340 expenses are higher than its $81,320 sales. The company reports the following expenses for this division. Unavoidable Avoidable Expenses $ 59,500 9,350 Expenses Cost of goods sold Direct expenses Indirect expenses $2,750 2,000 2,480 860 Service department costs 11,400 Should the division be eliminated? Electric Guitar Division is: Кept Eliminated Sales Expenses: Total expenses Net income (loss)

Answer 1

Electric Guitar Division is:	Kept	Eliminated
Sales	$81,320
Expenses:
Cost of Goods Sold	$59,500
Direct Expenses - Avoidable	$9,350
Indirect Expenses - Avoidable	$860
Service Department Costs - Avoidable	$11,400
Total Avoidable Expenses	$81,110
Profit (Loss) before unavoidable expenses	$210
Direct Expenses - Unavoidable	$2,750	$2,750
Indirect Expenses - Unavoidable	$2,000	$2,000
Service Department Costs - Unavoidable	$2,480	$2,480
Total expenses - Unavoidable	$7,230	$7,230
Net income (loss)	$(7,020)	$(7,230)

It is recommended to keep the guitar division because the division is producing $210 positive offset to unavoidable expenses. If this is eliminated the remaining divisions would have to absorb the unavoidable expenses of $7,230 in full which would decrease the overall net income.