1.Clothing sells clothing, shoes, and accessories at a location in Denton, TX. Information for the just concluded calendar year follows.

ClothingShoesAccessories

Sales$850,000$320,000$150,000

Less: Variable costs$510,000$270,000$82,500

Fixed costs290,00070,00042,000

Total costs$800,000$340,000$124,500

Operating income (loss)$50,000$(20,000)$25,500

Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Clothing will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe department is closed.

Required:

Your supervisor has asked you to determine whether the shoe department should be closed and the effect upon income if closed.

2.The following costs relate to a variety of decision settings:

Cost Decision

1 Allocated corporate overhead Closing a money-losing department

2 Cost of an old car Vehicle replacement

3. Direct materials Make or buy a product

4.Salary of marketing manager Project discontinuance; manager to be . transferred elsewhere in the firm

5 Home theater installation Purchase of a new home

6.Unavoidable fixed overhead Plant closure

7 Research expenditures incurred last year,

related to new product Product introduction to marketplace

8. $4 million advertising program Whether to promote product A or B with the $4 . million program

9.Manufactured cost of existing inventory Whether to discard the goods or sell them to . a third-world country

Required:

Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.

3.Presbyterian Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact ABC Food Service about the possibility of an outsourcing arrangement.

The hospital's business office has provided the following information for food service for the year just ended: food costs, $890,000; labor, $85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria net income, $80,000.

Conversations with ABC personnel revealed the following information:

a. ABC fwill charge St. Luke's Hospital $14 per day for each patient served..

b. Presbyterian's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.

c. Labor is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labor costs will drop by 90%.

d.ABC plans to use the hospital's facilities for meal preparation.

e.Cafeteria net income is expected to increase by 15% because ABC will offer an improved menu selection.

REQUIRED:

A. What is meant by the term "outsourcing"?

B. Should the hospital outsource its food-service operation to ABC?

C. What factors, other than dollars, should hospital management consider before making the final decision?