10861311: Homework - closing branches

Opened: Wednesday, 5 June 2024, 12:00 AM

Due: Sunday, 9 June 2024, 11:59 PM

Case study 4: Allied West, a wholesaler of specialised furniture, supplies furniture to three local retailers, Vogel, Brenner and Wisk. Exhibit 1 presents expected revenues and costs of Allied west by customer for the upcoming year using activity-based costing system. Allied west’s management accountant assigns costs to customers based on the activities needed to support each customer. Assume the following information:

Furniture handling labour costs vary with the number of units of furniture shipped to customers.
Allied west reserves different areas of the warehouse to stock furniture for different customers. For simplicity, we assume that furniture- handling equipment in an area and depreciation costs on the equipment that allied west has already acquired are identified with individual customers (customer level costs). Any unused equipment remains idle. The equipment had a one-year useful life and zero disposal value.
Allied west allocates its fixed costs to each customer on the basis of the amount of warehouse space reserved for that customer.
Marketing costs vary with the number of sales visits made to customers.
Sales order costs are batch- level costs that vary with the number of sales orders received from customers. Delivery processing costs are batch level costs that vary with the number of shipments made.
Allied west allocates fixed general- administration costs (facility level costs) to customers on the basis of customers revenues.
Allied furniture allocates its fixed corporate office costs to sales offices on the basis of the budgeted costs of each sales office. Allied west then allocates these costs to customers on the basis of customer revenues.

Exhibit 1:

	Vogel	Brenner	Wisk	Total
Revenues	$500,000	$300,000	$400,000	$1,200,000
Cost of goods sold (v)	370,000	220,000	330,000	920,000
Furniture- handling labour (V)	41,000	18,000	33,000	92,000
Furniture- handling equipment cost written off as depreciation (F)	12,000	4,000	9,000	25,000
Rent (F)	14,000	8,000	14,000	36,000
Marketing support (V)	11,000	9,000	10,000	30,000
Sales order and delivery processing (V)	13,000	7,000	12,000	32,000
General administration (F)	20,000	12,000	16,000	48,000
Allocated corporate- office costs (F)	10,000	6,000	8,000	24,000
Total costs	491,000	284,000	432,000	1,207,000
Operating income	$ 9,000	$16,000	$(32,000)	$(7,000)

Required:

should allied Furniture’s managers close allied west for the year? (recall that there is no disposal value for the equipment that allied west had already acquired. Closing Allied west will have no effect on total corporate office cost and there is no alternative use for the allied west space & the rent can’t be cancelled.)