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?

  • Assuming that these data are reliable, only the Ceramic Division should be closed.
  • Assuming that these data are reliable, none of the three divisions should be closed.
  • Assuming that these data are reliable, only the Stone Division should be closed.
  • Assuming that these data are reliable, both the Stone and the Granite Divisions should be closed.
  • Assuming that these data are reliable, only the Granite Division should be closed.

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 2 years ago
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