Import Distributors ,Inc ( IDI ) imported and distributed appliances to retail stores in the Rocky Mountain states. IDI has three board lines of merchandise: 1.Television Equipment
Each line accounted for about one-third of total sales IDI sales revenue;
In late 1993 : Company started to set up departmental income statements in obtain to see if each department is carrying its fair share of the load. In early April of 1994, the first departmental income statement were distributed to the management group. In the first quarter of 1994 television department had shown a gross margin that was much too small to cover the department’s operating expenses. As shown in following income statement.
For the first 3 Months of 1994
Net Sales Revenue $ 1,612,403.00
Cost of Sales $ 1,422,473.00
Gross Margin $ 189,930.00
Personnel Expenses $ 10,140.00
Department manager's office $ 12,393.00
Rent $ 50,107.00
Inventory, Taxes and insurance $ 37,274.00
Utilities $ 3,006.00
Delivery Cost $ 32,248.00
Sales Commissions $ 80,621.00
Administrative cost $ 40,310.00
Inventory financing charge $ 23,708.00
Total Operating Expenses $ 289,807.00
Profit Before Tax $ (99,877.00)
Income Taxes (credit) $ (34,957.00)
Net Income (loss) $ (64,920.00)
As mentioned before, the Television Department experienced a loss in first quarter of 1994. The accountant believes that discontinuing the product will be best alternatives for the company as a whole. But, before they make a decision, it better for them to identify theses key issues: •How much money can be saved if the company discontinuing the television? •Was the Television Department really experiencing lost? Or maybe this only because the company applies incorrect cost management system? •Moreover, was the first quarter of the year representative enough of longer-term results to consider discontinuing the television department? •Would discontinuing television equipment has negative impact of sales or others two departments? Case Analysis
First, we have to know how much money does company gain if closing down the television department, to do that, we need to analyze which of the operating expense is avoidable that can automatically erase when the operation shut down. DescriptionAvoidable cost?Reasons and Assumptions
The staffs serve for 3 departments. Means, the total cost will still occur, but will be carried only by two departments
No reduce number of workers or reduce salary.
Department Manager’s officeYesReasons:
There is no department of television thus no managers of department are needed. RentNoReasons:
IDI has agreement of the non cancellable lease for five years. Inventory taxes and insurancesYesReasons:
No inventory means no inventory taxes and insurances.
The left over inventory directly can be sold.
Utilities such as power does not needed when no operation
Even though, three departments using same building but they have separate space and control of power and no more machine to be heat up. Delivery CostNoReasons:
One third of total delivery cost is carried by Television Department, means, if the total sales of other departments remained the same, the cost will be on carried by them.
Same delivery runs.
The commission based on sales. No sales no commission.
The staffs serve for 3 departments. Means, the total cost will still occur, but will be carried only...