{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

If production is expected to exceed 140000 units it

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: allocated to the Northern Divisio n will be allocated to other divisio ns. 4. Solution Exhibit 11­34, Column 2, presents the relevant revenues and relevant costs of opening the Southern Divis io n (a divisio n whose revenues and costs are expected to be ident ica l to the revenues and costs of the Northern Divisio n). Grossman should open the Southern Divisio n because it would increase operating income by $40,000 (increase in relevant revenues of $1,500,000 and increase in relevant costs of $1,460,000). The relevant costs include direct materials, direct manufacturing labor, market ing and distribut ion, equipment, and divisio n general administration costs but not corporate office costs. Note, in particular, that the cost of equipment written off as depreciat ion is relevant because it is an expected future cost that Grossman will incur only if it opens the Southern Divisio n. Corporate office costs are irrelevant because actual corporate office costs will not change if Grossman opens the Southern Divis io n. The current corporate staff will be able to oversee the Southern Divisio n’s operations. Grossman will allo cate some corporate office costs to the Southern Divis io n but this allocat ion represents corporate office costs that are already current ly being allocated to some other divisio n. Because actual total corporate office costs do not change, they are irrelevant to the divisio n. SOLUTION EXHIBIT 11­34 Relevant­Revenue and Relevant­Cost Analys is for Closing Northern Divisio n and Opening Southern Divisio n Incremental (Loss in Revenues) Revenues and and Savings in (Incremental Costs) Costs from Closing from Opening Northern Division Southern Division (1) (2) $(1,500,000) $1,500,000 825,000 0 205,000 330,000 0 1,360,000 $ (140,000) (825,000) (100,000) (205,000) (330,000) 0 (1,460,000) $ 40,000 Revenues Variable direct materials and direct manufacturing labor costs Equipment cost written off as depreciat ion Marketing and distribut ion costs Divisio n general administration costs Corporate office costs Total costs Effect on operating inco me ( loss) 11­25 11­35 (30–40 min.) Make or buy, unknown level of volume. 1. The variable costs required to manufacture 150,000 starter assembli...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern