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

Department .

Total Y Z

Sales $2,500,000 $1,500,000 $1,000,000

Less variable expenses 2,000,000 1,100,000 900,000

Contribution margin 500,000 400,000 100,000

Less fixed expenses 370,000 250,000 120,000

Net income (loss) $ 130,000 $150,000 $(20,000)

A study indicates that $50,000 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 20 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. $110,000 increase

b. $110,000 decrease

c. $180,000 increase

d. $180,000 decrease

7. For many years Johnson Company has purchased the widgets that it installs in its standard line of gadgets.

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

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

the cost to produce the widgets would be greater than the current $10.70 per unit purchase price, based on production of 50,000 units:

Per Unit Total

Direct materials $4.50

Direct labor 3.20

Supervision 2.00 $100,000

Depreciation .90 $ 45,000

Variable overhead 0.75

Rent 0.15 $ 7,500

TOTAL COST $11.50

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 $30,000 per period. The dollar advantage or disadvantage per period of making the widgets would be:

a. $40,000 disadvantage

b. $40,000 advantage

c. $12,500 disadvantage

d. $12,500 advantage

Question 8 refers to the following:

Wintertime Company produces the handles which are used in the production of their snow shovels. Wintertimes costs to produce 100,000 handles annually are as follows:

Direct materials $45,000

Direct labor 35,000

Variable overhead 22,000

Fixed overhead 53,000

TOTAL $155,000

An outside supplier has offered to sell Wintertime similar handles for $1.40 per handle. If the handles are purchased from the outside supplier, $35,000 of annual fixed factory overhead will continue, and the facilities now being used to make the handles could be rented to another company for $65,000 per year.

8. If Wintertime chooses to buy the handles from the outside supplier, then the change in annual net income due to accepting the offer is a:

a. $80,000 decrease.

b. $35,000 increase.

c. $45,000 increase.

d. $62,000 increase.