Question
In: Accounting
StoneWorks is a company that sells tile. It has three profit centers: ceramic, stone and granite....
StoneWorks is a company that sells tile. It has three profit centers: ceramic, stone and granite. Below is financial information for the three centers for the year.
Ceramic Stone Granite
Revenue $100,000 $125,000 $150,000
Variable costs as a percentage of sales 40% 60% 64%
Fixed costs:
Costs unique to the profit center 30,000 45,000 64,000
Costs allocated by the retail store 6,000 7,000 8,000
Which ONE of the following statements is TRUE?
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Solutions
Expert Solution
In order to arrive at the decision of continuing or ceasing operations, we follow the relevant costing approach. Under this approach, only the costs which are unique to the functioning of such department shall be considered for decision-making, allocations shall be ignored.
Calculation of relevant net profit:
| Particulars | Ceramic | Stone | Granite |
| Revenue | $ 100,000 | $ 125,000 | $ 150,000 |
| Less: Variable Costs | $ 40,000 | $ 75,000 | $ 96,000 |
| (=100,000*40%) | (=125000*60%) | (=150000*64%) | |
| Contribution | $ 60,000 | $ 50,000 | $ 54,000 |
| Less: Unique fixed cost | $ 30,000 | $ 45,000 | $ 64,000 |
| Net Profit | $ 30,000 | $ 5,000 | $ (10,000) |
Since Granite division is the only option yielding losses, it is advisable to shut down the Granite division.
Hence, correct option = "Assuming that these data are reliable, only the Granite Division should be closed."
In case of any question on the above workings, please share the same in the comments section.
All the best!
ekkarill92 answered 1 year agoRelated Solutions
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