6. A merchandising company has two departments, Y and Z. A recent monthly income statement for the company follows:

Department .

Total Y Z

Sales $3,300,000 $2,500,000 $800,000

Less variable expenses 2,000,000 1,400,000 600,000

Contribution margin 1,300,000 1,100,000 200,000

Less fixed expenses 830,000 525,000 305,000

Net income (loss) $ 470,000 $575,000 $(105,000)

A study indicates that $150,000 of the fixed expenses being charged to department Z are sunk costs and allocated costs that will continue even if Z is dropped. In addition, the elimination of department Z will result in a 10 percent decrease in the sales of department Y. If department Z is dropped, what will be the effect on the income of the company as a whole?

a. $155,000 increase

b. $155,000 decrease

c. $295,000 increase

d. $295,000 decrease

7. For many years Donner Company has purchased the motors that it installs in its standard line of hair dryers.

Due to a reduction in output of certain of its products, the company has idle capacity that could be used to

produce the motors. The chief engineer has recommended against this move, however, pointing out that

the cost to produce the motors would be greater than the current $16.45 per unit purchase price, based on production of 40,000 units:

Per Unit Total

Direct materials $5.25

Direct labor 4.10

Supervision 4.00 $160,000

Depreciation .75 $ 30,000

Variable overhead 2.50

Rent 0.50 $ 20,000

TOTAL COST $17.10

A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge above is allocated based on space utilized in the plant. The total rent on the plant is $100,000 per period. The dollar advantage or disadvantage per period of making the widgets would be:

a. $24,000 disadvantage

b. $24,000 advantage

c. $26,000 disadvantage

d. $26,000 advantage