Exercise 13-9 Dropping or Retaining a Segment
Thalassines Kataskeves, S.A., of Greece makes marine equipment. The company has been experiencing losses on its bilge pump product line for several years. The most recent quarterly contribution format income statement for the bilge pump product line follows:
Thalassines Kataskeves, S.A.
Income Statement-Bilge Pump
For the Quarter Ended March 31
Variable manufacturing expenses ?330,000
Sales commissions 42,000
Total variable expenses 390,000
Contribution margin 460,000
Depreciation of equipment (no resale value) 80,000
General factory overhead 105,000*
Salary of product-line manager 32,000
Insurance on inventories 8,000
Purchasing department 45,000?
Total fixed expenses 540,000
Net operating loss ?(80,000)
*Common costs allocated on the basis of machine-hours.
?Common costs allocated on the basis of sales dollars.
The currency in Greece is the euro, denoted above by ?. Discontinuing the bilge pump product line would not affect sales of other product lines and would have no effect on the company's total general factory overhead or total Purchasing Department expenses.
Would you recommend that the bilge pump product line be discounted? Support your answer with appropriate coputions.
E 13-11 Sell or Process Further
Wexpro, Inc., produces several products from processing 1 ton of clypton, a rare mineral. Material and processing cost total $60,000 per ton, one-fourth of which is allocated to product X. Seven thousand units of product X are produced from each ton of clypton. The units can either be sold at the split-off point for $9 each, or processed further at total cost of $9,500 and then sold for $12 each.
Should product X be processed further or sold at the split-off point?
Bill has just returned from a duck hunting trip. He has brought home eight ducks. Bill's friend, John, disapproves of duck hunting, and to discourage Bill from further hunting, John has presented him with the following cost estimate per duck:
Camper and equipment:
Cost, $12,000; usable for eight seasons; 10 hunting trips per season $150
Travel expense (pickup truck):
100 miles at $0.31 per mile (gas, oil, and tires-$0.21 per mile; depreciation
and insurance-$0.10 per mile) 31
Shotgun shells (two boxes) 20
Cost, $2,320, usable for eight seasons; 10 hunting trips per season 29
Cost, $30 for the season; 10 hunting trips per season 3
Money lost playing poker:
Loss, $24 (Bill plays poker every weekend) 24
Bottle of whiskey:
Cost, $15 (used to ward off the cold) 15
Cost per duck ($272 ÷ 8 ducks)
Require: Which costs are relevant in a decision of whether Bill should give up hunting? Explain.
Decision on Segment disposition
Decision on slae or process after a common process
Identification of relevent costs