1. Explain the difference between the engineered-cost and discretionary-cost approaches to evaluating support departments.
2. Manuel Inc. produces textiles in many different forms. After recording lower than anticipated profits last year, Manuel has decided to shut down one of its divisions that is not performing well. The accounting manager has compiled the following data on the two divisions being considered for closing and asked you to evaluate the short-term and long-term effects on profits of closing each division. Which division should be closed and why?
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Winter Outerwear
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High End Suits
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Net revenues
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$1,000,000
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$5,000,000
|
|
Variable costs
|
500,000
|
2,000,000
|
|
Contribution margin
|
500,000
|
3,000,000
|
|
Controllable fixed costs
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0
|
2,000,000
|
|
Controllable margin
|
500,000
|
1,000,000
|
|
Noncontrollable fixed costs
|
750,000
|
1,500,000
|
|
Contribution by SBU
|
$ (250,000)
|
$ (500,000)
|