Question

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 18,000 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 1. Materials handing labour costs vary with the number of units of furniture shipped to customers. 2. Different areas of the warehouse stock furniture for different customers. Materials-handling equipment in an area and amortization costs on the equipment are identified with individual customer accounts. Any equipment not used remains idle. The equipment has a one-year useful life and zero disposal price. 3. Test allocates rent to each customer account on the basis of the amount of warehouse space

Answer 1

Answers:

1 Relevant Cost & Relevant Revenues:
Relevant revenues:
Sales		$      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, Rent, General administration cost are not relevant as they will remain same even if Yorkville is dropped or not dropped.

2 Operating income/Loss if Test drops Yorkville
Particulars	Total with Yorkville	Yorkville	Without Yorkville
Sales	$     1,450,000	$      340,000	$     1,110,000
Variable Expenses
Cost of Goods Sold	$        960,000	$      230,000	$        730,000
Materials handling: labor	$        117,000	$        48,000	$          69,000
Marketing support	$          32,000	$        11,000	$          21,000
Purchase orders and delivery processing	$          32,000	$        12,000	$          20,000
Fixed Expenses which wont change
Amortization on Materials Handling Equipment	$          27,000		$          27,000
Rent	$          43,000		$          43,000
General Administration	$          48,000		$          48,000
Operating income ( loss)	$        191,000	$        39,000	$        152,000

3. Test should keep Yorkville as customer because operating income of test will decrease by $ 39,000 on dropping Yorkville