1a.

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

				Department
	Total			Hardware			Linens
Sales	$	4,200,000		$	3,080,000		$	1,120,000
Variable expenses		1,238,000			837,000			401,000
Contribution margin		2,962,000			2,243,000			719,000
Fixed expenses		2,330,000			1,450,000			880,000
Net operating income (loss)	$	632,000		$	793,000		$	(161,000	)

A study indicates that $371,000 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 16% decrease in the sales of the Hardware Department.

Required:

What is the financial advantage (disadvantage) of discontinuing the Linens Department?

2.

Futura Company purchases the 71,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.70 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the companys chief engineer is opposed to making the starters because the production cost per unit is $12.00 as shown below:

	Per Unit			Total
Direct materials	$	5.00
Direct labor		2.50
Supervision		2.00		$	142,000
Depreciation		1.40		$	99,400
Variable manufacturing overhead		0.70
Rent		0.40		$	28,400
Total product cost	$	12.00

If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $142,000) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $89,000 per period. Depreciation is due to obsolescence rather than wear and tear.

Required:

What is the financial advantage (disadvantage) of making the 71,000 starters instead of buying them from an outside supplier?