Question

ny 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

Answer 1

1 Only variable cost are relevant Common cost are fixed cost which is unavoidable and not relevant for decision making Sales Relevant revenue Cost of goods sold Relevant costs Materials-handling labor costs Relevant costs Marketing support Relevant costs Purchase order and delivery processing Relevant costs Material handling equipment Relevant costs Variable costs Variable costs Variable costs Variable costs Avoidable cost 2 Operating Income if Yorkville is dropped $152,000 Evaluation of continue or discontinue Customer Differential Continue Drop Yorkville Yorkville Analysis (Decrease) Sales $1,450,000 $1,110,000 -$340,000 Variable expenses: Cost of goods sold $960,000 $730,000 -$230,000 Material handling labor costs $117,000 $69,000 -$48,000 Marketing support $32,000 $21,000 -$11,000 Purchase order and delivery processing $32,000 $20,000 -$12,000 Total variable expenses $1,141,000 $840,000 $301,000 Contribution margin $309,000 $270,000 $39,000 Fixed cost: Material handling equipment $27,000 $17,000 -$10,000 Rent $43,000 $43,000 $0 General Administration $48,000 $48,000 $0 Total Fixed cost $118,000 $118,000 -$10,000 Net Operating Income $191,000 $152,000 -$29,000 -$29,000 Decrease in Net Operating Income (If Yorkville is dropped) 3 Yorkville should be retained as Customer since there is drop in net operating income if dropped The contribution margin is higher than avoidable fixed cost hence dropping customer is unprofitable Common fixed cost are irrelevant cost in decision making since they are sunk cost The customer should be dropped only if contribution margin is lower than avoidable fixed cost