Acme Corp. has three divisions, X, Y, and Z. Division Xs income statement shows the following for the year ended December 31:

Sales $2,800,000

Cost of Goods Sold (1,900,000)

Gross Profit 900,000

Selling Expenses $375,000

Administrative Expenses 900,000 (1,,275,000)

Net loss $(375,000)

Cost of goods sold is 55% variable and 45% fixed. Of the fixed costs, 60% are avoidable if the division is closed. All of the selling expenses relate to the division and would be eliminated if Division X were eliminated. Of the administrative expenses, 65% are applied from corporate costs.

1. Should Acme close Division X or keep it?

2. What would be the increase or decrease in Acmes net income if it closes Division X?

8B. Special Order

Acme Corp.

Acme produces a high-quality computer chip. Unit production costs (based on the capacity production of 125,000 units per year) follow:

Direct material $60

Direct labor 32

Overhead (15% variable) 25

Total $101

Other information:

Sales price $119

SG&A costs 10

The Memory Division is presently operating at a level of 110,000 chips per year.

1. How much profit or loss will the Memory Division record if it accepts a special order on 5,000 chips at $98?

2. Should Acme accept the special order?