1. Bed & Bath, a retailing company, has two departments, Hardware and Linens. The companys most recent monthly contribution format income statement follows:

				Department
	Total			Hardware			Linens
Sales	$	4,300,000		$	3,180,000		$	1,120,000
Variable expenses		1,277,000			862,000			415,000
Contribution margin		3,023,000			2,318,000			705,000
Fixed expenses		2,270,000			1,430,000			840,000
Net operating income (loss)	$	753,000		$	888,000		$	(135,000	)

A study indicates that $372,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 17% decrease in the sales of the Hardware Department.

Required:

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Decrease

in net operating income

2. Delta Company produces a single product. The cost of producing and selling a single unit of this product at the companys normal activity level of 88,800 units per year is:

Direct materials	$	1.90
Direct labor	$	3.00
Variable manufacturing overhead	$	.80
Fixed manufacturing overhead	$	4.35
Variable selling and administrative expenses	$	1.20
Fixed selling and administrative expenses	$	2.00

The normal selling price is $20 per unit. The companys capacity is 112,800 units per year. An order has been received from a mail-order house for 2,000 units at a special price of $17.00 per unit. This order would not affect regular sales.

Required:

1.	If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the companys total fixed costs.)

2.

Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? (Round your answer to 2 decimal places.)