Jordan Walken owns and operates an electronics store in Seattle, Washington. His accountant has prepared a product line income statement that is reproduced below. (Jordan's two lines are MP3 players and accessories.) In preparing the income statement, the accountant allocated all common costs, including rent, Jordan's salary and the salary of his two assistants, utilities, and other common costs based on relative sales. His reason: Each product line needs to cover its share of common costs.0
In light of this report, Jordan is considering eliminating accessories and concentrating solelyon the sale of MP3 players (although he does not expect an increase in MP3 player sales).
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Required:
Analyze the effect on profit of dropping accessories. Then write a paragraph explaining the role of common costs in your analysis and how allocation of common costs can lead to the cost allocation death spiral.