If production is expected to exceed 140000 units it

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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...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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