Exercise 14-38

Fusion Metals Company is considering the elimination of its Packaging Department Management has Qosmg a Department received an offer from an outside firm to supply all Fusions packaging needs To help her in making the ^ ^ ^ gj decision, Fusions president has asked the controller for an analysis of the cost of running Fusions Packaging Department Included in that analysis is $9,100 of rent, which represents the Packaging Departments allocation of the rent on Fusions factory building If the Packaging Department is eliminated, the space it used will be converted to storage space Currently Fusion rents storage space in a nearby warehouse for $11,000 per year The warehouse rental would no longer be necessary if the Packaging Department were eliminated

1. Discuss each of the figures given in the exercise with regard to its relevance in the departmentclosing decision.

2. What type of cost is the $ 11,000 warehouse rental, from the viewpoint of the costs of the Packaging Department?

1.	(a) $9,100 allocation of rent on factory building: Irrelevant, since Fusion Metals Company will rent the entire factory building regardless of whether it continues to operate the Packaging Department. If the department is eliminated, the space will be converted to storage space.
	(b) $11,000 rental of storage space in warehouse: Relevant, since this cost will be incurred only if the Packaging Department is kept in operation. If the department is eliminated, this $11,000 rental cost will be avoided.
2.	The $11,000 warehouse rental cost is the opportunity cost associated with using space in Fusion Metals Companys factory building for the Packaging Department.