Question

Lake 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 $ 140,000 Supervisory salaries 300,000 Allocation of companywide facility-level costs 130,000 Original cost of building 220,000 Book value of building 100,000 Market value of building 160,000 Maintenance costs on equipment 112,000 Real estate taxes on building 12,000 Required Determine the amount of avoidable cost associated with the segment.

Answer 1

Answer:

the amount of avoidable cost associated with the segment is $754,000

Explanation:

The cost associated with the segment to be eliminated including:

- Advertising expense $140,000  

- Supervisory salaries  $300,000  

- Allocation of companywide facility-level costs  $130,000  

- The loss for unsold building (*): $60,000

- Maintenance costs on equipment  $112,000

- Real estate taxes on building  $12,000

The total cost is $754,000

(*) The earning from sold building (book value) = Market value of building $160,000 - Book value of building  $100,000 =  $60,000