ACTG2020_Week5 2014 Ch12CMD (1)

Lo 1 addingdropping segments one of the most

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Unformatted text preview: whether to add or drop a business segment, such as a product or a store. Let’s see how relevant costs should Let’s see how relevant costs should be used in this type of decision. be used in this type of decision. LO 2 A Contribution Margin Approach DECISION RULE Lovell should drop the digital watch segment only if its profit would increase. This would only happen if the fixed cost savings exceed the lost contribution margin. Let’s look at this solution. Let’s look at this solution. LO 2 Adding/Dropping Segments Segment Income Statement Digital Watches Sales Less: variable expenses Variable manufacturing costs Variable shipping costs Commissions Contribution margin Less: fixed expenses General factory overhead Salary of line manager Depreciation of equipment Advertising – direct Rent – factory space General admin. expenses Net operating loss $ 500,000 $ 120,000 5,000 75,000 $ 60,000 90,000 50,000 100,000 70,000 30,000 200,000 $ 300,000 400,000 $ (100,000) LO 2 A Contribution Margin Approach Contribution Margin Solution Contribution margin lost if digital w atches are dropped $ (300,000) Less fixed costs that can be avoided Salary of the line manager Advertising – direct Rent – factory space Net disadvantage 260,000 $ (40,000) $ 90,000 100,000 70,000 R Re a ett ain in LO 2 Comparative Income Approach The Lovell solution can also be obtained by preparing comparative income statements showing results with and without the digital watch segment. Let’s look a...
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This note was uploaded on 03/28/2014 for the course ACTG 2020 taught by Professor Lizfarrel during the Spring '11 term at York University.

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