Question

Ramos Corporation is considering the elimination of one of its segments. The segment incurs the following fixed costs. If the segment is eliminated, the building it uses will be sold. Advertising expense $ 70,000 Supervisory salaries 150,000 Allocation of companywide facility-level costs 65,000 Original cost of building 110,000 Book value of building 50,000 Market value of building 80,000 Maintenance costs on equipment 56,000 Real estate taxes on building 6,000
Required
Based on this information, determine the amount of avoidable cost associated with the segment.

Answer 1

Answer:

$362,000

Explanation:

The market value of the building is an opportunity cost that is avoidable.

Ramos would avoid the real estate taxes if it sold the building.

Therefore,

Amount of avoidable cost associated with the segment:

= Annual advertising expense + Market value of the building (opportunity cost) + Annual maintenance costs on equipment + Annual real estate taxes on the building + Annual supervisory salaries

= $ 70,000 + $80,000 + $56,000 + $6,000 + $150,000

= $362,000