Question

A guitar manufacturer is considering eliminating its electric guitar division because its $100,280 expenses are higher than its $94,300 sales. The company reports the following expenses for this division.

Avoidable Unavoidable
Expense Expense
Cost of goods sold $56, 000
Direct expenses 9,250 $1,250
Indirect expenses 470 1, 600
Service department costs 6,000 1,430
Should the division be eliminated?
Electric Guitar Division is: Kept Eliminated
Sales 72,000
Expenses:
Direct expenses 1,250
Indirect expenses 1,600
Service department costs 1,430
Cost of goods sold 56,000
Total expenses 56,000 4,280
Net income (loss) 4,280
Revenues from electric guitar division
Avoidable expenses
Revenues are greater than (less than) avoidable expenses by
The electric guitar division should be:________.

Answer 1

The electric guitar division should be: KEPT.

Step-by-step explanation:

Avoidable Unavoidable

Expense Expense

Cost of goods sold $56, 000

Direct expenses $9,250 $1,250

Indirect expenses $470 $1,600

Service department costs $6,000 $1,430

total $71,720 $4,280

I believe that the $100,280 expenses and $94,300 sales are wrong, because total costs = $76,000. I looked up for more information and the correct sales number was $72,000.

differential analysis

division kept division sold differential

amount

revenues $72,000 $0 $72,000

COGS -$56, 000 ($56,000)

direct expenses -$9,250 -$1,250 ($8,000)

indirect expenses -$470 -$1,600 $1,130

service costs -$6,000 -$1,430 ($4,570)

total $280 -$4,280 $4,560