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.
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Stacey Pinto
Accountant
Dubai
United Arab Emirates
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Original Message:
Sent: 01-09-2021 04:08 AM
From: Tayba Al-Mehdar
Subject: CMA 2 part C help question.
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. | | | | |
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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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