Question

A guitar manufacturer is considering eliminating its electric guitar division because its $83,720 expenses are higher than its $76,540 sales. The company reports the following expenses for this division. Avoidable Expenses Unavoidable Expenses Cost of goods sold $ 59,000 Direct expenses 9,450 $ 2,650 Indirect expenses 890 2,400 Service department costs 6,800 2,530 Should the division be eliminated

Answer 1

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Particular                Avoidable expense ($) Unavoidable expense ($)

Sales                                   76,540

Less - Cost of goods sold -59,000

Less-Direct expenses          -12,100                                  2,650

                                       (9,450+2,650)

Less -Indirect expenses -3,290                                        2,400

                                          (890+2,400)  

Less - Service department costs -9,330                           2,530

                                           (6,800+2,530)

Sum of Total expenses         83,720                                     7,580

Net income                            -7,180                                     -7,580

Electric guitar division revenue = $76,540

Avoidable Expenses =  Electric Guitar Division Expenses - Unavoidable Expenses

= $83,720  - $7,580

= $76,140

Revenue=Electric Guitar Division Revenue-Avoidable Expenses

= $76,540 - $76,140

= $400

According to the analysis, company will end up with the loss if company continues production. But if they keep the production the future loss will be decrease than the present loss. So they should not be eliminated the production.