What are the relevant costs? What would be the effect on the company\'s overall

Question

What are the relevant costs?

What would be the effect on the company's overall net operating income if product XRAY were dropped?

Should the product be dropped or kept? Why? Support your answer with at least one credible source other than your text.

Is it in the company’s best interest to close the XRAY facility? Why or why not? Be sure to explain your answer.

The Superman Corporation The Superman Corporation produces two products: XRAYTM sunglasses and NightVisionTM reading glasses. This corporation is considering dropping their XRAY sunglasses. If Superman discontinues their sunglasses, the company will close the XRAY factory in Kryptonite, Indiana. The plant, which originally cost $3.5M to build, employs 50 full time manufacturing employees and eight office workers. The factory is one of the largest employers in town, and it is unlikely that the manufacturing employees will find comparable work within 50 miles Additionally, since the plant was originally located on the outskirts of town, it was "grandfathered" in to the town's new zoning restrictions. Additionally, if the plant is closed, it cannot be sold to another manufacturing company. The land is worth about $150,000 Data from the company's annual report for last year is listed below Sales Variable Manufacturing Costs Contribution Margin Traceable Selling & Administration Expenses Product Line Segment Margin Common Fixed Costs Net Income (loss) Company $ 800,000 $ 440,000 $ 360,000 184,000 XRAY Night Vision 400,000 239,000 161,000 28,000 400,000 201,000 199,000 156,000 $ 176,000 248,000

Explanation / Answer

Solution 1:

Relevant cost are cost the can be avoided on discontiue of Xray division i,e = Variable manufacturing cost + Traceable selling and administration

= $201,000 + $156,000 = $357,000

Solution 2:

Avoidable cost on dropping Xray product = $357,000

Loss of revenue = $400,000

Net advantage (Disadvantage) on dropping XRAY product = $357,000 - $400,000 = ($43,000)

Solution 3:

As there is net financial disadvantage of $43,000 on dropping XRAY product, therefore product should not be dropped. Further dropping XRAY will result in employee will not be able to find job in market and company is not able to sell plant to other manufacturing company, therefore overall it is adverse on the company to drop XRAY Product.

Solution:

No, it is not in interest of the company to close XRAY facility as same is resulting in decrease in overall net operating income by $43,000.

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