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Accounting Assignment for the Two Companies Report (Assessment)

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Updated: May 4th, 2022

East Company

Original Order Alternative 1 – Selling the Equipment to Ray Corporation Alternative 2 – Convert the Equipment Alternative 3 – Sell the Machine as is
Sale Price 800,000 680,000 645,000 550,000
Deposit ( Other Income ) 80,000 80,000 80,000 80,000
Cost of the Manufactured Machine
Direct Materials 150,000 200,000 215,000 150,000
Direct Labor 250,000 310,000 270,000 250,000
Variable Overhead 125,000 155,000 135,000 125,000
Fixed Over Head 62,500 77,500 67,500 62,500
Fixed Administration Costs 58,875 74,250 68,750 58,875
Total Cost 646,375 816,750 756,250 646,375
Gross profit 233,625 -56,750 -31,250 -16,375
Expenses
Special Orders Commissions 2% 0 13,600 0 0
Standard Models Commissions 1% 0 0 6450 0
Discount 2% 16,000 0 12900 0
Total expenses 16,000 13,600 19,350 0
Net income (loss) 217,625 -70,350 -50,600 -16,375

Discussion

In this given situation, East Company has to select one out of three given alternatives for selling its equipment. The first option is to sell the equipment after specific reworking, the second option is to convert the equipment to a standard model and sell it and the last option is to sell it without any further processing.

First of all, it is assumed that the deposit received by the company is non-refundable which allows us to treat it as other income. Now before examining the relevant information related to the available choices, it is important to know that the cost already incurred on the equipment is irrelevant in reaching our decision, thus the incremental costs for each option shall be considered. Although the first two options offer a higher selling price than the third one, as it is assumed in accounting that there is a linear relationship between revenue and cost, they both require additional conversion costs and overhead costs. Moreover, other expenses like a commission paid and discount offered are also forming part of the incremental cost. After computing the total cost of the first two options it can be seen that the total cost is more than the selling price thus showing a net loss. On the other hand, the third option does not require any additional costs but at the same time offers a comparatively low selling price which is insufficient to cover up the costs on the equipment which has already been incurred.

It is, therefore, concluded that all three options show a net loss. Among all three available alternatives, the third one shows the lowest amount of loss and thus, it is recommended that the East Company shall sell the equipment as is without making any changes to the equipment and incurring additional costs.

Hall Company

West Dept. East Dept. Combined Total Company Expenses (Existing – Without the Elimination) Expenses would be Eliminated by Closing the East Department ( Saving ) The Expense that will continue (the new West Dept Income Statement )
Sales 972,000 580,000 1,552,000 1,552,000 0 972,000
Cost of goods sold 534,000 414,000 948,000 948,000 0 534,000
Gross profit 438,000 166,000 604,000 604,000 0 438,000
Other Income (Leased Equipment) 0 0 0 0 0 80,000
operating expenses
Direct expenses
Advertising 35,000 24,000 59,000 59,000 24,000 35,000
Store Supplies Used 9,000 7,600 16,600 16,600 7,600 9,000
Depreciation-Store Equipment 11,000 6600 17,600 17,600 0 17,600
Total direct expenses 55,000 38,200 93,200 93,200 31,600 61,600
Allocated expenses
Sales Salaries 250,000 150,000 400,000 400,000 150,000 218,720
Rent expense 18,880 9,440 28,320 28,320 0 28,320
Bad Debts Expense 19,800 16,200 36,000 36,000 16,200 19,800
Office Salary 37,440 24,960 62,400 62,400 24,960 18,720
Insurance Expense 4,000 2,200 6,200 6,200 1,320 880
Miscellaneous office expenses 4,800 3,200 8,000 8,000 1,600 1,600
Total allocated expenses 334,920 206,000 540,920 540,920 194,080 288,040
Total expenses 389,920 244,200 634,120 634,120 225,680 349,640
Net income (loss) 48,080 -78,200 -30,120 -30,120 0 168,360

Discussion

In this scenario, the General Manager of Hall Company has asked to evaluate whether to eliminate the east department. Since it is assumed that the elimination of East department will not have any effect on the sales and gross profit of the West department, therefore, only expenses need to be analyzed.

As per given information, if the company decides to shut down East it can avoid expenses like sales salaries, office salaries, advertising, bad debts, and supplies expenses, whereas insurance and miscellaneous expenses can be reduced from 50% to 60% of the current amounts respectively, and the remainder will be transferred to West department. On the other hand, sales and office salaries expense will have to be adjusted as half of the office salaries expense is to be charged to the sales salaries expense. After making all these adjustments have been made it is important to note that the total expenses that will continue to incur after eliminating East department are less than the total expenses that West department is incurring at present and the reason is a reduction of 20 % in the sales salaries.

Upon elimination of the East department the company has an option to increase its revenue by leasing the equipment left to others which will increase its net income considerably. If the company does not shut down the department it will continue to report an overall loss, whereas, the change will result in a more profitable West department as compared to its current position. Therefore, it is viable for the Hall Company to go for the downsizing of its business because the level of profitability will be much higher than at present.

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