Question

in Desktop App dy) Tell me what you want to do 16 Α' Α' Β I u er Av Ao Editing Evet Question 4: Ar er West company supplies furniture to three local retailers, Mogul, Penner, and Slicer Inc. The following exhibit presents representative revenues and costs of West by customers for the year 2019. Additional information on West's costs for different activities at various levels of the cost hierarchy is as follows: Header Mogul $550,000 380,000 Penner $330,000 220,000 18,000 Slicer $440,000 340,000 33,000 Total $1,320,000 $940,000 $92,000 W 41,000 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 10,000 14,000 11,000 13,000 20,000 489,000 $61,000 6,000 8,000 9,000 7,000 12,000 280,000 $50,000 8,000 14,000 10,000 12,000 16,000 433,000 $7,000 $24,000 $36,000 $30,000 $32,000 $48,000 $1,202,000 $118,000 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 100% G S.)

Answer 1

1 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 Note: Only variable cost are relevant Fixed costs are sunk cost and not relevant for decision making 2 Operating Income if Slicer is dropped $81,000 Existing Discontinue Differential Slicer Analysis $880,000 $440,000 $1,320,000 Sales Variable expenses: Cost of goods sold Material handling labor costs Marketing support Purchase order and delivery processing Total variable expenses Contribution margin Fixed cost: Material handling equipment Rent General Administration Total Fixed cost Net Operating Income $940,000 $92,000 $30,000 $32,000 $1,094,000 $226,000 $600,000 $59,000 $20,000 $20,000 $699,000 $181,000 -$340,000 -$33,000 -$10,000 -$12,000 -$395,000 -$45,000 $24,000 $36,000 $48,000 $108,000 $118,000 $16,000 $36,000 $48,000 $100,000 $81,000 $8,000 $0 $0 -$8,000 $37,000 3 Slicer 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