A merchandising company has two departments, Gadgets and Gizmos. A recent monthly income statement for the company follows:

Department

Total Gadgets Gizmos

Sales $$1,190,000$ $$750,000$ $$440,000$ 

Less variable expenses $650,000430,000220,000$ 

Contribution margin $540,000320,000220,000$ 

Less fixed expenses $460,000230,000230,000$ 

Net operating income $($loss$)$  $$80,000$ $$90,000-$$$10,000$ 

A study indicates that $$95,000$ of the fixed expenses being charged to Gizmos are sunk costs or allocated costs that will continue even if Gizmos is dropped. In addition, the elimination of Gizmos will result in a $15\%$ increase in the sales of Gadgets.

Required:

If Gizmos is dropped, what will be the effect on the net operating income of the company as a whole? Would you recommend Gizmos be dropped? Briefly explain why.

Part B$.$ 

Our company produces several products from a base, J$5-$ABC. Material and processing costs for the base product total $$5,000$ per tonne $($per $1,000$ kg$).$ J$5-$ABC can either be sold at the split$-$off point or processed further. Further processing using a tonne of J$5-$ABC will cost $$8,100$ and produce $900$kg of J$5-123$ that sells for $$26/$kg$.$ Prior to further processing, the $1,000$ kg of J$5-$ABC can sell for $$12/$kg$.$ 

Required:

Should J$5-$ABC be processed further or sold at the split$-$off point?