Question

In: Accounting

Kalamazoo Paper Company has three divisions: Recycling, Cardboard, and Paper. In order to determine the profit...

Kalamazoo Paper Company has three divisions: Recycling, Cardboard, and Paper. In order to determine the profit provided by each division, the company allocates all costs to the three divisions. As a result, for the year ended December 31, 2015, Kalamazoo reported a profit of $50,000 for Recycling, a profit of $60,000 for Paper, and a loss of $30,000 for Cardboard. If Cardboard has avoidable costs of $40,000 and unavoidable costs of $50,000 which of the following actions should be taken by the company? Select one:

a. Eliminate the Cardboard Division because the division's unavoidable costs exceed the amount of the loss.

b. Continue the Cardboard Division because the revenue generated by the division exceeds the avoidable costs.

c. Continue the Cardboard Division because the revenue generated by the division exceeds the unavoidable costs.

d. Eliminate the Cardboard Division because the company's total net income would increase by $30,000.

Solutions

Expert Solution

(c)  Continue the Cardboard Division because the revenue generated by the division exceeds the unavoidable costs.

REASON:

Avoidable costs are those which can be eliminated if a particular product or department, with which they are directly related, is discontinued. For example, salary of the clerks employed in a particular department can be eliminated, if the department is discontinued.

Unavoidable cost is that cost which will not be eliminated with the discontinuation of a product or department. For example, salary of factory manager or factory rent cannot be eliminated even if a product is eliminated.

Since the revenue generated by cardboard division is $60,000 which is greater than unavoidable costs of $50,000, hence if the division is discontinued , it will occur a cost of $50,000 being unavoidable costs which is higher than the loss of $30,000.

Therefore, the cardboard division should be continued because the revenue generated by the division exceeds the unavoidable costs.

ekkarill92 answered 1 year ago
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