Ifthereis insufficientdemandtosellanother125unitsof

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Unformatted text preview: 65,000 Division D $450,000 370,500 96,000 466,500 $(16,500) 11­31 2. Division A Fixed costs of goods sold ($450,000 ─ $405,000; $390,000 ─ $370,500) Fixed S,G & A ($100,000 ─ $60,000; $120,000 ─ $96,000) Total fixed costs Fixed costs savings if shutdown ($85,000 ´ 0.60; $43,500 ´ 0.60) $45,000 40,000 $85,000 $51,000 Division D $19,500 24,000 $43,500 $26,100 Divisio n A’s contribut ion margin o f $65,000 more than covers its avo idable fixed costs of $51,000. The difference of $14,000 helps cover the company’s unavo idable fixed costs. Since $51,000 of Divisio n A’s fixed costs are avoidable, the remaining $34,000 is unavo idable and will be incurred regardless of whether Divis io n A continues to operate. Divisio n A’s $20,000 loss is the rest of the unavo idable fixed costs ($34,000 ─ $14,000). If Divisio n A is closed, the remaining divis io ns will need to generate sufficient profits to cover the entire $34,000 unavo idable fixed cost. Consequent ly, Divisio n A should not be closed since it helps defray $14,000 of this cost. In contrast, Divis io n D earns a negat ive contribut ion margin, which means its revenues are less than its variable costs. Divisio n D also generates $26,100 of avo idable fixed costs. Based strict ly on financial considerations, Divisio n D should be closed because the company will save $42,600 ($26,100 + $16,500). An alternative set of calculat ions is as fo llows: Division A Total variable costs Avo idable fixed costs if shutdown Total cost savings if shutdown Loss of revenues if shutdown Cost savings minus loss of revenues $465,000 51,000 516,000 530,000 $ (14,000) Division D $466,500 26,100 492,600 450,000 $ 42,600 Divisio n A should not be shut down because loss of revenues if Divis io n A is shut down exceeds cost savings. Divis io n D should be shut down because cost savings fro m shutting down Divisio n D exceeds loss of revenues. 3. Before deciding to close Divisio n D, management should consider the role that the Divisio n’s product line plays relative to other product lines. For instance, if the product manufactured by Divisio n D attracts customers to the company, then dropping Divis io n D may have a detrimental effect on the revenues of the re...
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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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