Question

Wilson Co. has three segments -- Tennis, Golf, and Fishing. The Tennis segment is currently producing 2,000 units annually. The units sell for $200 each. The cost of each unit is $110. The Tennis segment spends $100,000 on product design each year. The segment also is allocated $200,000 of annual facility-level costs. Calculate the avoidable cost if Wilson Co. were to eliminate the Tennis segment.
What can be considered relevant costs?

Answer 1

Answer:

The tennis department relevant costs are variable manufacturing costs ($220,000) and product design ($100,000).

Explanation:

First of all Wilson should eliminate its tennis department (since it is not profitable) only if it can use their production facilities to make something else that does generate profit or just sell that facility.

tennis department net profit = $400,000 - $520,000 = -$120,000 or $120,000 net loss

The department's major cost comes from the allocation of $200,000 in facility level costs, but these costs are not relevant. Relevant costs are costs that can be avoided by making a business decision like closing a business department.