
a.
Mention whether Company BM should eliminate Division B or not. Justify by preparing companywide income statements.
a.

Explanation of Solution
Special order decisions: Special order decisions include circumstances in which the board must choose whether to acknowledge abnormal customer orders. These requests or orders normally necessitate special dispensation or include a demand for lesser price.
Outsourcing: It can be termed as conveying all or part of an activity to a supplier or a provider. While outsourcing was initially limited to fundamental activities, it as of now invades the administration of numerous organizations.
Opportunity cost: Opportunity cost is the forfeit of certain benefits such as cost savings, incomes, which is surrendered by not picking an option. Opportunity costs are applicable in decisions where the acknowledgment of one option disqualifies the likelihood of selecting different alternatives.
Determine the contribution to profit:
Therefore the contribution to profit is ($18,000).
The companywide income statement before and after eliminating Division B is as follows:
Company BM | ||
Companywide income statement | ||
Particulars | Keep | Eliminate |
Division B | Division B | |
Sales | $ 5,100,000 | $4,500,000 |
Less: Cost of goods sold: | ||
Unit-level | ($3,100,000) | ($2,700,000) |
Rent on manufacturing facility | ($620,000) | ($470,000) |
Gross margin | $1,380,000 | $1,330,000 |
Less: Operating expenses | ||
Unit-level selling and administration expenses | ($309,000) | ($281,000) |
Division-level fixed selling and administration expenses | ($400,000) | ($360,000) |
Headquarters facility-level costs | ($300,000) | ($300,000) |
Net income (loss) | $371,000 | $389,000 |
Table (1)
From the results obtained above, the contribution to profit is negative at ($18,000). Hence the Division B should be eliminated.
Therefore Division B should be eliminated.
b.
Explain whether the recommendations in Requirement A would change if the units are increased to 20,000 units. Justify by comparing differential avoidable cost and revenue for Division B.
b.

Explanation of Solution
Initiate by calculating the cost price per unit and the selling per unit that will vary with respect to the quantity of units produced and sold. The result is to be divided with the total cost for respective group by 20,000 units to compute the cost per unit. The headquarters facility-level costs are not considered for analysis since these costs are not avoidable.
Determine the selling price per unit:
Therefore the selling price per unit is $30.
Determine the unit level manufacturing costs
Therefore the unit level manufacturing costs is $20.
Determine the unit level selling and administrative costs
Therefore the unit level selling and administrative costs is $1.40.
Determine the contribution to profit:
The comparison between differential revenue and avoidable cost is determined in the below step.
Therefore the contribution to profit is $68,000.
From the results obtained above, the profit contributed by Division B would be 30,000 units. Hence the division should not be eliminated. Additionally, it is vital to consider the growth prospective before choosing to eliminate a segment.
Therefore, Division B should not be eliminated.
c.
Explain whether to operate the division with volume of 30,000 units or it should be closed.
c.

Explanation of Solution
Determine the profit or loss of the division:
Therefore the loss of the division is ($102,000).
The reasons on whether to operate the division with volume of 30,000 units or it should be closed is as follows:
It is mentioned that Company BM is paying $150,000 to lease the manufacturing facility for Division B.
The business could earn $170,000
By operating the division, the organization is allowing up the chance to sublease the office.
This is an opportunity cost that would be avoidable by eradicating Division B.
Consequently, it must be considered for analysis. If the volume is 30,000 units Division B contributes $68,000 as profit.
When considering opportunity cost, the profit turns into a loss of $102,000. According to these conditions, Division B should be eliminated.
Therefore Division B should be eliminated.
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Chapter 13 Solutions
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