1. Bits & Pieces, a division of Gargantuan, Inc., currently produces 2,000,000 units of a particular...
1. Bits & Pieces, a division of Gargantuan, Inc., currently produces 2,000,000 units of a particular product called Morsels. The division manager is concerned that the Morsels product line detracts from the overall profitability of the division and company. The costs associated with the Morsels product line are:
Unit Variable Cost $0.15 per unit
Total Fixed Cost $150,000
If Bits & Pieces were to discontinue the Morsels product line, 70% of the total fixed costs would be removed. The relevant costs that should be used to determine whether the division should discontinue the Morsels product line are:
a. $300,000.
b. $345,000.
c. $380,000.
d. $405,000.
e. $450,000.
Homework Answers
Answer
d. $405,000
Calculations:
| Units | $ 2,000,000.00 | |
| (X) | Variable cost per unit | $ 0.15 |
| (=) | Variable Cost | $ 300,000.00 |
| (+) | Avoidable Fixed cost | $ 105,000.00 |
| (=) | Relevant cost | $ 405,000.00 |
In case of any doubt, please comment.
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