ACCA F5 Shutdown problems
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Hi John
Well explained thanks
Thank you for your comment 馃檪
Hi sir,
shut down of a product, branch or segment oftten involves redundancy cost, release of unwanted noncurrent asset for sale,selling cost of the noncurrent asset,dismentale and restoration cost of machinaries.Are these items are considered in ‘Continue or Shut Down Decision.”
Yes – all incremental costs and savings are considered (just as in relevant cost questions).
As I understand:
if we stok Rooks the effect on change will be loosing 10000 (-15000+5000)
if we make Crowns we gain 14000 (+20000-6000) so the decision is Making Crowns as we will gain 4000= -10000+14000
Im right?
Sir in example 1 part b why Rooks stopped in question total profit is given $5000 and if we make crowner instead of Rook it gives us a total profit of $4000? confused??
Stopping Rooks does not give a total profit of $4,000.
It gives an increase in profit of $4,000 – watch the lecture again and you will see (or study the answer in the lecture notes).
Hi John,
It says the extra fixed cost is 6,000 in scenario b for Crowners. But in the solution, only this 6,000 is deducted to calculate the net gain from ceasing Rooks and taking up Crowners.
But, what happens to the net fixed cost of 13,000 allocated to Rooks (18,000 – 5,000 avoidable fixed cost). Why isn’t this allocated to Crowners in place of Rooks while calculating the net gain of taking up Crowners?
Is this 13,000 allocated to the other 2 products? (Pawns and Bishops) in this case?
If not, What is the reason behind ignoring this part of the fixed cost?
The total fixed costs at the moment are $55,000.
If the stop Rooks then they save $5,000 and the total fixed costs fall to $50,000.
How they decide to allocate the part of the $50,000 that was allocated to Rooks is irrelevant and they can allocate any way they want to.
All that we are concerned with in making the decision is what will be the affect on the overall profit.
Stopping Rooks saves 5,000, doing Crown costs an extra 6,000.
The rest of the fixed costs stay (in total) unchanged) and therefore have no affect on the current profit.
Thank you for the explanation. Appreciate it!
Hi sir, what i don”t get here is that in example 1 (b) why do we shut down rooks when the current effect is $4000. isn”t Rooks are making profit. thanks in advance.
You need to watch the lecture again.
In 1(b) if we stop Rooks then we are able to make Crowners, and making Crowners will end up giving more profit to the company.
i see, i guess i had misunderstood the requirement earlier. thanks sir,i have got a clear view now 馃檪
You are welcome 馃檪
HI John,
As always, many thanks for the lectures.
In example 1, what happens with the remaining fixed costs of 拢13000.00. Should it not be attributed to other products and during the manufacturing of new product Crowners, should it not be considered in the total cost.
Please advice.
Thanks
Jitin
If we were required to show the profitability of each of the remaining products separately, then yes it would have to be attributed to them.
However that is not required here – all we are required to do is determine whether or not we should stop Rooks. So all we need is the effect on the total profit.
(If we were required to re-allocate the fixed overheads – which is very unlikely – we would need to be given more information as to on what basis)
Got it. Many Thanks John.
You are welcome 馃檪