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 1 year ago
Next > < Previous

Related Solutions

Profit Center Responsibility Reporting A-One Freight Inc. has three regional divisions organized as profit centers. The...
Profit Center Responsibility Reporting A-One Freight Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 20Y3. Revenues—Air Division $ 1,290,700 Revenues—Rail Division 1,562,500 Revenues—Truck Division 2,729,100 Operating Expenses—Air Division 817,900 Operating Expenses—Rail Division 929,900 Operating Expenses—Truck Division 1,650,400 Corporate Expenses—Shareholder Relations 196,300 Corporate Expenses—Customer Support 665,000 Corporate...
Profit Center Responsibility Reporting A-One Freight Inc. has three regional divisions organized as profit centers. The...
Profit Center Responsibility Reporting A-One Freight Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance using operating income as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 20Y3. Revenues—Air Division $ 1,104,600 Revenues—Rail Division 1,295,000 Revenues—Truck Division 2,401,200 Operating Expenses—Air Division 700,000 Operating Expenses—Rail Division 770,700 Operating Expenses—Truck Division 1,452,100 Corporate Expenses—Shareholder Relations 168,000 Corporate Expenses—Customer Support 613,800 Corporate...
Horatio Inc. has three divisions which are operated as profit centers. Actual operating data for the...
Horatio Inc. has three divisions which are operated as profit centers. Actual operating data for the divisions listed alphabetically are as follows. Compute the missing amounts. Operating Data Women’s Shoes Men’s Shoes Children’s Shoes Contribution margin $270,000 $ (3) $180,000 Controllable fixed costs 100,000 (4) (5) Controllable margin (1) 90,000 95,000 Sales 600,000 450,000 (6) Variable costs (2) 320,000 250,000 Prepare a responsibility report for the Women’s Shoes Division assuming (1) the data are for the month ended June 30,...
Tile World Ltd. is a tile company and has 20,000 shares of common stock outstanding at...
Tile World Ltd. is a tile company and has 20,000 shares of common stock outstanding at a market price of $29.50 a share, 6,500 shares of preferred stock outstanding at $55 a share, and 600 bonds outstanding that are selling for 85 percent of their $1,000 face value. The firm's pre-tax cost of debt is 8.9 percent. The cost of eqity is 14.7 percent and the cost of preferred is 8.8 percent. What is the firm's weighted average cost of...
World ​Aeronautics, which sells​ aircraft, has two profit​ centers, Systems and Assembly. Systems makes navigation equipment...
World ​Aeronautics, which sells​ aircraft, has two profit​ centers, Systems and Assembly. Systems makes navigation equipment and transfers them to​ Assembly, which then puts together the aircraft for external sale. Systems can make up to 200 units a year at a variable cost of ​$2 million each. Assembly has variable costs of $ 14 million per aircraft. Assembly receives an order for 6 planes for a price of ​$25 million each. Suppose that Systems has no ability to sell its...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $ 862,000 Revenues—West 1,036,000 Revenues—Central 1,890,000 Operating Expenses—East 563,600 Operating Expenses—West 621,840 Operating Expenses—Central 1,167,900 Corporate Expenses—Shareholder Relations 150,000 Corporate Expenses—Customer Support 360,000 Corporate Expenses—Legal 252,000 General Corporate Officers’ Salaries 274,500 The company...
Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO)...
Traxonia Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31, 2016: Revenues—East $ 866,000 Revenues—West 1,030,000 Revenues—Central 1,890,000 Operating Expenses—East 565,700 Operating Expenses—West 627,360 Operating Expenses—Central 1,170,060 Corporate Expenses—Shareholder Relations 156,000 Corporate Expenses—Customer Support 320,000 Corporate Expenses—Legal 255,200 General Corporate Officers’ Salaries 273,500 The company...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $878,000 Revenues—West 1,042,000 Revenues—Central 1,880,000 Operating Expenses—East 563,600 Operating Expenses—West 619,680 Operating Expenses—Central 1,172,940 Corporate Expenses—Shareholder Relations 155,000 Corporate Expenses—Customer Support 333,000 Corporate Expenses—Legal 233,100 General Corporate Officers’ Salaries 278,500 The company operates...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $ 878,000 Revenues—West 1,042,000 Revenues—Central 1,880,000 Operating Expenses—East 563,600 Operating Expenses—West 619,680 Operating Expenses—Central 1,172,940 Corporate Expenses—Shareholder Relations 155,000 Corporate Expenses—Customer Support 333,000 Corporate Expenses—Legal 233,100 General Corporate Officers’ Salaries 278,500 The company...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer...
Red Line Railroad Inc. has three regional divisions organized as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31: Revenues—East $ 870,000 Revenues—West 1,034,000 Revenues—Central 1,880,000 Operating Expenses—East 565,700 Operating Expenses—West 621,360 Operating Expenses—Central 1,174,660 Corporate Expenses—Shareholder Relations 150,000 Corporate Expenses—Customer Support 350,000 Corporate Expenses—Legal 264,000 General Corporate Officers’ Salaries 281,000 The company...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT