Toon Town Toy Company is considering the elimination of its Packaging Department. Management has received an offer from an outside firm to supply all Toon Towns packaging needs. to help her in making the decision, Toon Town’s president has asked for an analysis of the cost of running Toon Town’s Packaging Department. Included in that analysis is $11,000 of rent, which represents the Packaging Department’s allocation of the rent on Toon Town’s factory building. If the Packaging Department is eliminated, the space it used will be converted to storage space. Currently Toon Town Rents storage space in a nearby warehouse for $13,000 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 te department-closing decision.
2. What type of cost is the $13,000 warehouse rental, from the viewpoint of the costs of the Packging Department