Let's break down **relevant** and **irrelevant** costs for Orion Manufacturing's decision about whether to eliminate the ElectroMax segment. ### Step 1: **Identify Relevant Costs and Benefits** Relevant costs are **future costs that will change as a result of the decision**. Sunk costs and unavoidable costs are not relevant. Let's analyze each item: #### 1. **Advertising expense: $120,000 annually** - **Relevant?** Yes. This cost will be avoided if the segment is eliminated. #### 2. **Supervisory salaries dedicated to the segment: $280,000** - **Relevant?** Yes. These are direct salaries that will be saved. #### 3. **Corporate overhead allocation: $150,000** - **Relevant?** **No.** This is an **allocation**, not an actual cash outlay that will be avoided. Unless the overhead itself is eliminated, it is not relevant. (Usually, such allocated overhead would be redistributed to other segments.) #### 4. **Building (original purchase price: $250,000; book value: $110,000; market value: $170,000)** - **Relevant?** - **Original purchase price:** **Not relevant** (sunk cost). - **Book value:** **Not relevant** (sunk cost, for accounting only). - **Market value:** **Relevant.** If the building is sold, $170,000 in cash is realized. - **Opportunity cost:** Keeping the segment means forgoing $170,000 cash. #### 5. **Annual equipment maintenance: $95,000** - **Relevant?** Yes. This is an annual cost that will be avoided. #### 6. **Property taxes on building: $15,000 annually** - **Relevant?** Yes. If the building is sold, these taxes will not be paid. --- ### Step 2: **Summary Table** | Cost/Benefit | Annual Amount | Relevant? | Reason | |----------------------------------|---------------|-----------|------------------------------------------------------------| | Advertising expense | $120,000 | Yes | Avoidable if segment is closed | | Supervisory salaries | $280,000 | Yes | Avoidable if segment is closed | | Corporate overhead allocation | $150,000 | No | Not avoided; reallocated | | Building original purchase price | $250,000 | No | Sunk cost | | Building book value | $110,000 | No | Sunk cost | | Building market value (sale) | $170,000 | Yes | Cash inflow if sold | | Equipment maintenance | $95,000 | Yes | Avoidable if segment is closed | | Property taxes | $15,000 | Yes | Avoidable if building is sold | --- ### Step 3: **Summary of Relevant Cash Flows** **Annual costs avoided if closed:** - Advertising: **$120,000** - Supervisory salaries: **$280,000** - Equipment maintenance: **$95,000** - Property taxes: **$15,000** **Total annual costs avoided:** **$510,000** **One-time cash inflow:** - Proceeds from sale of building: **$170,000** --- ### Step 4: **What is NOT Relevant** - Corporate overhead allocation (**$150,000**) is **not relevant** unless actual cash outflows will be reduced. - Sunk costs (original purchase price and book value) are **not relevant**. --- ## **Conclusion:** **Relevant items for the decision:** - Advertising expense ($120,000/year) - Supervisory salaries ($280,000/year) - Equipment maintenance ($95,000/year) - Property taxes ($15,000/year) - Sale proceeds from building ($170,000, one-time) **Irrelevant items:** - Corporate overhead allocation ($150,000) - Building original purchase price and book value **When deciding whether to eliminate the ElectroMax segment, focus ONLY on the costs that will actually be avoided and the cash proceeds from the sale of assets.**

Certainly! To prepare the income statement, balance sheet, and statement of cash flows related to the decision about eliminating the ElectroMax segment, we need to organize the relevant information. --- ### 1. **Income Statement (for the segment, if it continues)** **Assumption:** The segment's revenues and other expenses (not provided) are not considered here. The focus is on relevant costs and savings. **Relevant Costs (Annual):** - Advertising expense: $120,000 - Supervisory salaries: $280,000 - Equipment maintenance: $95,000 - Property taxes: $15,000 **Total relevant expenses** = $510,000 **Note:** If the segment is eliminated, these costs will be avoided, improving profitability by this amount (assuming no other revenues or costs). --- ### 2. **Balance Sheet (Impact of sale of building)** **Assets affected:** | Asset | Amount | Notes | |---------------------------|------------------------------|------------------------------------------------| | Building (Market value) | **$170,000** | To be sold if segment is eliminated | | Equipment (related to segment) | Not specified, assume salvage value or no book value provided | If any, would be sold or written off at book value | | Cash | +$170,000 (from sale) | Proceeds from sale of building | **Liabilities:** No specific liabilities are mentioned. **Equity:** Impacted indirectly through changes in assets and net income. --- ### 3. **Statement of Cash Flows (for the sale of the building and segment elimination)** **Operating Activities:** - Save annual costs: $510,000 (cash savings if segment is eliminated) **Investing Activities:** - Sale of building: +$170,000 cash inflow **Financing Activities:** - Not applicable here unless financing is involved. **Net effect:** - **Cash inflow** of **$170,000** from sale - Annual cash savings of **$510,000** from avoidable costs --- ### **Summary** | **Component** | **Details** | |--------------|--------------| | **Income Statement (if segment continues)** | Revenues (unknown) – $510,000 (relevant costs) = Segment profit/loss (not provided) | | **Balance Sheet (if segment is eliminated)** | Assets decrease by the book value of the building; cash increases by $170,000 from sale | | **Statement of Cash Flows** | **Inflow:** $170,000 from sale of building<br>**Savings:** $510,000 annually from avoided costs | --- ### **Additional notes:** - If the segment is eliminated, you would remove its revenues and relevant costs from the company’s income statement. - The decision should also consider any additional fixed costs or revenues not provided here. - The sale proceeds contribute to cash flows immediately, while cost savings are ongoing benefits. --- **Would you like a detailed projected financial statement with hypothetical revenues or additional data?**