CMA Study Group

CMA 2 part C help question.

  • 1.  CMA 2 part C help question.

    Posted 19 days ago
    why is allocated corporate cost considered irrelevant ?? i thought anything allocated is relevant


    The management accountant for a bookstore has prepared the following income statement for the most current year:
     
    Cook Book
    Travel Books
    Classics
    Total
    Sales
    $60,000
    $100,000
    $40,000
    $200,000
    Cost of goods sold
    36,000
    65,000
    20,000
    121,000
    Contribution margin
    $24,000
    $  35,000
    $20,000
    $  79,000
    Order and delivery processing
    18,000
    21,000
    8,000
    47,000
    Rent (per sq. ft. used)
    2,000
    1,000
    3,000
    6,000
    Allocated corporate costs
    7,000
    7,000
    7,000
    21,000
    Operating profit
    $ (3,000)
    $    6,000
    $  2,000
    $    5,000
    If the company drops Cook Book, the square footage used will return to the landlord. Dropping Cook Book will cause the company's operating profit to be
    Answer (B) is correct.
    The overall company profit is now $5,000. It would decline to $1,000 if the Cook Book division is eliminated. Currently, the total contribution margin is $79,000, but that would decline by the $24,000 contributed by Cook Book to a level of $55,000. Order costs would drop to $29,000 without the costs of the Cook Book division. Total rent would become $4,000, but allocated costs would remain $21,000. Therefore, the new operating profit would be $1,000 ($55,000 CM – $29,000 – $4,000 – $21,000). Consequently, profits would be $4,000 lower without the Cook Book division.


    ------------------------------
    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
    ------------------------------


  • 2.  RE: CMA 2 part C help question.

    Posted 18 days ago
    Hi,

    Allocated corporate cost is irrelevant because the company will still incur this even the Cook Book will be dropped.

    ------------------------------
    JHON PAULO DE PADUA
    Accountant
    DUBAI
    United Arab Emirates
    ------------------------------



  • 3.  RE: CMA 2 part C help question.

    Posted 18 days ago
    Allocated Corporate cost is "Sunk cost" which is irrelevant in decision making.

    Thank you

    ------------------------------
    Badar Ghafoor
    Accountant
    Dubai
    United Arab Emirates
    ------------------------------



  • 4.  RE: CMA 2 part C help question.

    Posted 18 days ago
    Allocated corporate costs are irrelevant because they are not directly related to cookbook and so if cookbook is eliminated then the costs of 7000 will be absorbed by the other products.

    ------------------------------
    Stacey Pinto
    Accountant
    Dubai
    United Arab Emirates
    ------------------------------



  • 5.  RE: CMA 2 part C help question.

    Posted 17 days ago

    Hi Tayba,

    The corporate costs won´t disappear. Therefore dropping Cook Book will not influence the total amount corporate costs to be allocated.

    The Operating profit of Cook Book ignoring the allocated corporate costs is:

    $ 4,000 ($(3,000) + $ 7,000). That portion ($ 4,000) of contribution to Operating profit will be missed dropping Cook Book.

     

    Leandra Tel

     

    Sent from Mail for Windows 10