In addition to selling custom-designed jewelry, Darrah’s Jewelry Store also offe
ID: 2427879 • Letter: I
Question
In addition to selling custom-designed jewelry, Darrah’s Jewelry Store also offers repair and appraisal services. After reading the following profit report, decide whether Darrah’s should drop the appraisal service
Jewelry Sales
Repair Service
Appraisals
Revenues
$90,000
$45,000
$5,000
Cost of sales (service)
45,000
25,000
1,000
Product margin
$45,000
$20,000
$4,000
Facility-sustaining costs
15,000
15,000
15,000
Profit
$30,000
$ 5,000
$(11,000)
Jewelry Sales
Repair Service
Appraisals
Revenues
$90,000
$45,000
$5,000
Cost of sales (service)
45,000
25,000
1,000
Product margin
$45,000
$20,000
$4,000
Facility-sustaining costs
15,000
15,000
15,000
Profit
$30,000
$ 5,000
$(11,000)
Explanation / Answer
Darrah’s should not drop the appraisal service because Appraisals have the highest Product margin of 80% of all the services Darrah is providing. Darrah is treating all divisions including the Appraisals division, equally to distribute the Facility- sustaining costs and allocated the Facility costs equally between all divisions i.e $15000 per division. This unfair allocation of the costs is providing the loss to the Appraisals division.
If we allocate the Facility- sustaining costs on the basis of Revenue, it will be going to be a fair distribution of common Facility costs. Considering the bifercation of costs in divisions revenue basis, the Appraisals profit will come into positive figure and the profit report will look like :
Jewelry Sales
Repair Service
Appraisals
Revenues
$90,000
$45,000
$5,000
Cost of sales (service)
45,000
25,000
1,000
Product margin
$45,000
$20,000
$4,000
Facility-sustaining costs
28928
14464
1608
Profit
$16072
$ 5536
$2392
Jewelry Sales
Repair Service
Appraisals
Revenues
$90,000
$45,000
$5,000
Cost of sales (service)
45,000
25,000
1,000
Product margin
$45,000
$20,000
$4,000
Facility-sustaining costs
28928
14464
1608
Profit
$16072
$ 5536
$2392
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