The CFO approaches you and wants to discuss a delicate matter. She indicates that they are looking at the possibility of outsourcing the rakes department as she believes that it is low performing. She has done some initial research and has found a manufacturer out of Vietnam that can provide these rakes for $39,000/each. She provides you with a departmental carve-out income statement from the rake's division. The CFO also remarks that she believes she remembers from her management accounting class that there is a concept of avoidable cost & sunk cost that might play a role in this analysis, she is hoping you can explain that to her as part of your memo. Additionally, she is worried about a specific piece of machinery that is used in the rakes department that cost $3,500,000 to buy and would have no other uses, the CFO believes it could be sold for $120,000.

Per 100 units sold

Sales $ 4,500,000

Direct Materials 2,200,000

Direct Labour 1,000,000

Fixed expenses

Salaries 400,000

Sales staff commissions 275,000

Rent 200,000

Amortization - specialized equipment 175,000 (cost is mentioned above)

Training 115,000

Data processing 105,000

Insurance 75,000

Total Fixed Expenses 1,345,000

Net operating income (45,000)

From your research you have determined the following:

The salaries are made up of 25% salaried management level employees & the rest are hourly wages from production staff. This department employees about 15 employees some of which are part-time

Commissions are paid strictly on the sales of rakes

Rent & data processing are allocated by head office

Training is to instruct new staff on the specialized piece of equipment

Insurance is 75% the rakes division share of Midwest's general liability policy, the other 25% is specifically held for the specialized equipment, that can be cancelled with no penalty.

Required:

A memo to the CFO that discusses her mentioned concerns regarding the avoidable and non-avoidable costs and why selling a product line with a negative operating income does not always make sense.

To support your analysis, show a calculation for the Rakes Division based on the above information