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15 August, 12:46

A guitar manufacturer is considering eliminating its electric guitar division because its $83,720 expenses are higher than its $76,540 sales. The company reports the following expenses for this division. Avoidable Expenses Unavoidable Expenses Cost of goods sold $ 59,000 Direct expenses 9,450 $ 2,650 Indirect expenses 890 2,400 Service department costs 6,800 2,530 Should the division be eliminated

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  1. 15 August, 13:09
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    Answer and Explanation:

    According to the scenario, computation of the given data are as follow:-

    Particular Avoidable expense ($) Unavoidable expense ($)

    Sales 76,540

    Less - Cost of goods sold - 59,000

    Less-Direct expenses - 12,100 2,650

    (9,450+2,650)

    Less - Indirect expenses - 3,290 2,400

    (890+2,400)

    Less - Service department costs - 9,330 2,530

    (6,800+2,530)

    Sum of Total expenses 83,720 7,580

    Net income - 7,180 - 7,580

    Electric guitar division revenue = $76,540

    Avoidable Expenses = Electric Guitar Division Expenses - Unavoidable Expenses

    = $83,720 - $7,580

    = $76,140

    Revenue=Electric Guitar Division Revenue-Avoidable Expenses

    = $76,540 - $76,140

    = $400

    According to the analysis, company will end up with the loss if company continues production. But if they keep the production the future loss will be decrease than the present loss. So they should not be eliminated the production.
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