Exercise I. (12 Points).

Luxury Linens has three departments: Bath, Kitchen, and Bedding. The most recent income statement, showing the total operating profit and departmental results is shown below:

	Total	Bath	Kitchen	Bedding
Sales	$2,100,000	$1,000,000	$500,000	$600,000
Cost of goods sold	(1,260,000)	(500,000)	(360,000)	(400,000)
Gross profit	840,000	500,000	140,000	200,000
Direct expenses	(420,000)	(200,000)	(120,000)	(100,000)
Allocated expenses	(325,000)	(100,000)	(150,000)	(75,000)
Net income (loss)	$ 95,000	$ 200,000	$(130,000)	$25,000

Based on this income statement, management is considering eliminating the Kitchen department. If the Kitchen department is eliminated, the other departments will expand to fill the space but sales are not expected to change. Twenty percent of Kitchen's allocated expenses will be avoided due to restructuring and the remainder reallocated equally to Bath and Bedding. Show an analysis indicating whether the Kitchen department should be eliminated.

Exercise 2. (18 Points).

Generalware, Inc. sells a single product and reports the following results from sales of 100,000 units:

Sales ($45 unit) ... $4,500,000

Less costs and expenses:

Direct materials ($16/unit). $1,600,000

Direct labor ($9/unit).. 900,000

Variable overhead ($3/unit)... 300,000

Fixed overhead ($8.10/unit).......... 810,000

Variable administrative ($4.50/unit). 450,000

Fixed administrative ($4/unit)... 400,000

Total costs and expenses... $(4,460,000)

Operating income $ 40,000

A foreign buyer wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Generalware will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order.

Required:

(1) Should Generalware accept the order if it does not affect regular sales? Explain.

(2) Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales. Should the company accept the special order under these circumstances?