Martz Company Has Three Departments Martz Company Is Considering Eliminating Department C Because It Has

question 48

Essay

Martz Company has three departments. Data for the most recent year is presented below: $\begin{array}{llll}&C&A&T\\\text { Sales } & \$ 4,000 & \$ 1,920 & \$ 2,240 \\\text { Variable expenses } & 3,280 & 1,420 & 520 \\\text { Fixed expenses: } & & & \\\text { Unavoidable } & 480 & 180 & 440 \\\text { Avoidable } & 555 & 265 & 360\\\text { Operating income (loss)}&(315)&55&920\end{array}$ Martz Company is considering eliminating department C because it has a loss. Required:
a. Compute the change in operating income if Martz Company eliminates Department C and does not replace it.
b. Compute the change in operating income if Martz Company replaces Department C with a second Department T. This will double the sales of Department T without increasing fixed cost.

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Definitions:

Percent of Sales Method

A financial analysis tool used to forecast future expenses or accounts such as bad debts, based on a percentage of sales.

Bad Debts Expense

Represents the amount of accounts receivable a business does not expect to collect and charges off as a loss in its financial statements.

Net Credit Sales

The total revenue from sales made on credit minus any returns or allowances.

Promissory Note

A fiscal device comprising a binding commitment from one party to another to remit a precise sum of money, which can be demanded anytime or on a predetermined date.