A guitar manufacturer is considering eliminating its electric guitar division because its $76,000 expenses are higher than its $72,000 sales. The company reports the following expenses for this division.

Avoidable Expenses Unavoidable Expenses

Cost of goods sold $56,000

Direct expenses 9,250 $1,250

Indirect expenses 470 1,600

Service department costs 6,000 1,430

Should the division be eliminated?

If the Division is eliminated, income will decrease by $280

Explanation:

Giving the following information:

Sales = $72,000

Expenses = $76,000 sales.

Avoidable Expenses - Unavoidable Expenses

Cost of goods sold: $56,000

Direct expenses: 9,250 - $1,250

Indirect expenses: 470 - 1,600

Service department costs: 6,000 - 1,430

We need to determine if eliminating the Division will increase income.

Current loss = $4,000

Effect on income = unavoidable costs - current loss

Effect on income = - (1,250 + 1,600 + 1,430) + 4,000

Effect on income = $280 decrease