Question

Chris Co. has three segments - Surfing, Mountain Biking, and Fly Fishing. The Surfing segment is currently producing 1000 units annually. The units sell for $500 each. The cost of each unit is $400. The Surfing segment spends $110,000 on product design each year. The segment also is allocating $100,000 of annual facility-level costs. Calculate the avoidable cost of Chris Co. were to eliminate the Surfing segment.

Answer 1

Answer:

The tennis department relevant costs (avoidable costs) are variable manufacturing costs ($400,000) and product design ($110,000).

Explanation:

First of all Chris Co. should eliminate its surfing department (since it is not profitable) only if it can use their production facilities to make something else that does generate profit or just sell that facility.

surfing department net profit = $500,000 - $610,000 = -$110,000 or $110,000 net loss

The department's major loss comes from the allocation of $100,000 in facility level costs, but these costs are not relevant or avoidable. Relevant costs are costs that can be avoided by making a business decision like closing a business department.