70.2K

Verified Solution

Link Copied!

5)The management of Fiona Co is considering the closure of one of its
operations, department 3, and the financial accountant has submitted
the following report:
Department		1	2	3	Total
Sales (units)		5000	6000	2000	13000
Sales ($)		150000	240000	24000	414000
Cost of sales ($)
Direct material		75000	150000	10000	235000
Direct labour		25000	30000	8000	53000
Production overhead		5769	6923	2308	15000
Total costs		105769	186923	20308	303000
Gross profit		44231	53077	3692	101000
Less expenses		15384	18461	6155	40000
Net profit		28847	34616	-2463	61000
Additional information:
production overheads of $15,000 have been apportioned to the
three departments on the basis of unit sales volume
expenses are head office overheads, again apportioned to
departments on sales volume.
As management accountant, you further ascertain that, on a cost driver
basis:
50% of the production overheads can be directly traced to
departments and so could be allocated on the basis 2:2:1.
Similarly 60% of the expenses can be allocated 3:3:2, with the
remainder not being possible to allocate.
80% of the so called		direct labour is fixed and cannot be readily
allocated. The remaining 20% is variable and can be better
allocated on the basis of sales volume.
(a) Restate the financial position in terms of the contribution made by
each department and, based on these figures, make a clear
recommendation.
(b) Discuss any other factors that should be considered before a final
decision is made.

Answer & Explanation Solved by verified expert

See Answer