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.
I don’t know how to calculate direct labour, production overhead and expenses before contribution. What does mean 2:2:1??
Thanks