Accounting Assignment for the Two Companies

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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

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

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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Accounting Assignment for the Two Companies

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