Question

Layout References Review View Help Open in Desktop App Tell me what you want to do -ody) V 16 V Α' Α' B I U ON A A Ev EvĄ, Question 4: Test company supplies furniture to three local retailers, Hanson, Penner, and Yorkville Inc. The following exhibit presents representative revenues and costs of Test by customers for the year 2019. Additional information on Test's costs for different activities at various levels of the cost hierarchy is as follows: Hanson $750,000 470,000 47,000 Penner $360,000 260,000 22,000 Yorkville $340,000 230,000 48,000 Total $1,450,000 $960,000 $117,000 Sales Cost of goods sold Materials handling labour Materials-handling equipment (Cost written off as amortization) Rent Marketing support Purchase orders and delivery processing General administration Total operating costs Operating income 11,000 16,000 12,000 13,000 20,000 589.000 $161,000 6,000 8,000 9,000 7,000 12,000 324,000 $36,000 10,000 19,000 11,000 12,000 16,000 346,000 -$6,000 $27,000 $43,000 $32,000 $32,000 $48,000 $1,259,000 $191,000 slichtlich

Answer 1

1.

Relevant revenues		$ 340,000
Relevant costs
Cost of goods sold	$230,000
Materials handling labor	48,000
Marketing support	11,000
Purchase orders and delivery processing	12,000
Total relevant costs		$ 301,000

Amortization cost on material handling equipment is not relevant, as the cost of the equipment has already been incurred in the past, and is therefore, a sunk cost.

Rent is not relevant as it is not avoidable. General administration cost is also an allocated expense, and is unavoidable.

2.

	Hanson	Penner	Total
Sales	$ 750,000	$ 360,000	$ 1,110,000
Relevant Expenses
Cost of Goods Sold	470,000	260,000	730,000
Materials handling: labor	47,000	22,000	69,000
Marketing support	12,000	9,000	21,000
Purchase orders and delivery processing	13,000	7,000	20,000
Segment margin	208,000	62,000	270,000
Amortization on Materials Handling Equipment			27,000
Rent			43,000
General Administration			48,000
Operating income ( loss)			$ 152,000

3. Test should keep Yorkville as a customer. Dropping Yorkville results in reduction of operating income by $ 39,000. This is because the contribution margin of $ 39,000 ( $ 340,000 - $ 301,000) from Yorkville towards absorbing fixed unavoidable costs would be lost.