The production of other products would yield the

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the production of other products would yield the lowest (170000 125000 = 45000 less than the cost of making the bottles)
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Learning Objective 3 Deletion or Addition of Products, Services, or Departments
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Deletion or Addition of Products, Services, or Departments Often, existing businesses will want to expand or contract their operations to improve profitability. Decisions to add or to drop products or whether to add or to drop departments will use the same analysis: examining all the relevant costs and revenues. Relevant information plays an important role in decisions about adding or deleting products, services, or departments.
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Avoidable and Unavoidable Costs Avoidable costs are costs that will not continue if an ongoing operation is changed or deleted. Eg: Department Salaries Unavoidable costs are costs that continue even if an operation is halted. Common costs are costs of facilities and services that are shared by users. Eg: Store Depreciation, Air conditioning
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Department Store Example Consider a discount department store that has three major departments: Groceries General merchandise Drugs
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Department Store Example Departments Total Groceries General Merchandise Drugs Sales $ 1,900 $1,000 $800 $100 Variable Expenses 1,420 800 560 60 Contribution Margin $480 (25%) $200 (20%) $240 (30%) $40 (40%) Fixed Expenses Avoidable $265 $150 $100 $15 Unavoidable $180 $60 $100 $20 Total Fixed Expenses $445 $210 $200 $35 Operating Income / Loss $35 $(10) $40 $5
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Department Store Example Assume that the only alternatives to be considered are dropping or continuing the grocery department, which has consistently shown an operating loss. The vacated space would be idle and the unavoidable costs would continue. Which alternative would you recommend?
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Department Store Example Store as a Whole Total Before Change Effect of Dropping Groceries Total After Change Sales $ 1,900 $ 1,000 $ 900 Variable Expenses 1,420 800 620 Contribution Margin $ 480 $ 200 $ 280 Avoidable Fixed Expenses $ 265 $ 150 $ 115 Profit Contribution to common space and other unavoidable cost $ 215 $ 50 $ 165 Common space and other Unavoidable Expenses $ 180 0 $ 180 Operating Income / Loss $ 35 $ 50 $ (15)
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Department Store Example The income is worse rather than better, if the store drops the groceries department The vacated space will be idle. Due to the unavoidable cost allocation, the grocery department showed loss. This unavoidable costs can not be eliminated, when the store drops the grocery department
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Department Store Example Assume that the store could use the space made available by the dropping of groceries to expand the general merchandise department. This will increase sales by $500,000, generate a 30% contribution margin, and have avoidable fixed costs of $70,000.
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Department Store Example Store as a Whole Total Before Change Drop Groceries Expand General Merchandise Total After Change Sales $ 1,900 - $ 1,000 $ 500 $ 1,400 Variable Expenses 1,420 - 800 $ 350 $ 970 Contribution Margin $ 480 - $ 200 $ 150 $ 430 Avoidable Fixed Expenses $ 265 - $ 150 $ 70 $ 185 Profit Contribution to common space and other unavoidable cost $ 215 - $ 50 $ 80 $ 245 Unavoidable Expenses $ 180 - 0 0 $ 180 Operating Income $ 35 - $ 50 $ 80 $ 65
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Department Store Example $80,000 increase in operating income from general merchandise is more than offsets of the $50,000 decline from eliminating groceries Overall income also raises $65,000 - $35,000 = $30,000
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  • Fall '19
  • Limited Resources, Nantucket Nectars, Misspecified Costs

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