Free Accounting Dissertations - 1. The Three Divisions Of Onata In The Were Sept, Oct And Nov And The
Brief
1.
The three divisions of Onata in the brief were Sept, Oct and Nov and the same names have been used here.
Operating income of the company is sales minus fixed and variable costs. Table 1 below shows the operating income of both individual divisions and the company.
Table 1: Operating income of Onata in 2004
in $
Sept
Oct
Nov
Onata
Sales
1200
600
240
2040
Variable expenses
-384
-156
-102
-642
Fixed expenses
Unavoidable
-288
-156
-36
-480
Avoidable
-348
-312
-162
-822
Operating income
180
-24
-60
96
Onata had a $96 operating income in 2004.
Contribution is sales minus variable costs. As compared to operating income, contribution doesn’t include fixed costs because it assumes fixed cost to be a sunk cost and hence shouldn’t be involved in decision making. Table 2 shows the contribution of each division.
Table 2: Contribution of each division of Onata in 2004
In $
Sept
Oct
Nov
Onata
Sales
1200
600
240
2040
Variable expenses
-384
-156
-102
-642
Contribution
816
444
138
1398
All three divisions of Onata made positive contribution in 2004. The operating income of each division is shown in table 1.
All divisions make positive contribution; their existence is justified in the short run. In the long run, each division should make positive operating income to justify returns on investments. Oct and Nov divisions have positive contribution but negative operating income. So Oct and Nov can be eliminated.
But both Oct and Nov have large avoidable fixed costs. Table 3 shows operating income without avoidable fixed costs.
Table3: Operating income without avoidable fixed costs
In $
Sept
Oct
Nov
Sales
1200
600
240
Variable expenses
-384
-156
-102
Fixed expenses
Unavoidable
-288
-156
-36
Operating income
528
288
102
Now all divisions have positive operating costs. If Onata can reduce fixed cost by eliminating avoidable fixed costs then all three divisions should be kept. If Onata can’t reduce avoidable costs, then it should eliminate Oct and Nov.
2.
The decision to accept or reject the order is based on the contribution of that order and the presence of nay alternative orders. Let’s assume in this case there are no alternative orders. Table 4 shows the sales and variable costs of the new order.
Table 4: Sales and variable costs of the new order
In $
Number of units
1,000
Sales price per unit
140
Total additional sales
140,000
Current material
1,600,000
20% of material
320,000
Current labour
2,400,000
20% of labour
480,000
Table 5 shows the contribution of the new order. The indirect cost is calculated as the 1% (1,000/100,000) of $1,500,000.
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