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DECISION MAKING
Discontinuation Decisions - Example
Total Approach:
Profit/loss if continue:
Sales R400 000
Direct material (R250 000)
Depreciation (sunk cost - not relevant) (R0)
Salaries and wages (R170 000)
Loss (R20 000)
Profit/loss if discontinue:
Once off income/costs:
Retrenchment pay (R60 000)
Initially the entity will incur an extra R40 000 (R60 000 – R20 000) to close down Division A.
They will however save R20 000 per annum in the long run if the shut the division down.
Therefore Division A should be discontinued.
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