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Grossman will allo cate some corporate office costs

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Unformatted text preview: 2. Grossman’s will generate incremental operating inco me o f $128,000 fro m selling 4,000 addit ional tables and, hence, should try to increase table sales. The calculat ions fo llow: Incremental Revenues (Costs) and Operating Income $500,000 (300,000) (42,000)* (30,000)† * 0 * * 0 * $128,000 Revenues Direct materials and direct manufacturing labor Cost of equipment written off as depreciat ion Marketing and distribut ion costs General administration costs Corporate office costs Operating inco me * Not e that the additional costs of equipment are relevant future costs for the “selling more tables decision” because they represent incremental future costs that differ bet ween the alternatives of selling and not selling additional tables. † Current marketing and distribution costs which varies with number of shipments = $70,000 – $40,000 = $30,000. As the sales of tables double, the number of shipments will double, resulting in incremental marketing and distribution costs of (2 ´ $30,000) – $30,000 = $30,000. ** General administration and corporate offi ce costs will be unaffected i f Grossman decides to sell more tables. Hence, these costs are irrelevant for the decision. 11­24 3.Solution Exhibit 11­34, Column 1, presents the relevant loss of revenues and the relevant savings in costs fro m closing the Northern Divis io n. As the calculat ions show, Grossman’s operating inco me would decrease by $140,000 if it shut down the Northern Divis io n (loss in revenues of $1,500,000 versus savings in costs of $1,360,000). Grossman will save variable manufacturing costs, market ing and distribution costs, and divis io n general administration costs by closing the Northern Divis io n but equipment­related depreciat ion and corporate office allocat ions are irrelevant to the decisio n. Equipment­related costs are irrelevant because they are past costs (and the equipment has zero disposal price). Corporate office costs are irrelevant because Grossman will not save any actual corporate office costs by closing the Northern Divis io n. The corporate office costs that used to be...
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