Part A

Acme Manufacturing is trying to decide whether to eliminate Department Z, which has produced low profits or losses for several years.The company's departmental income statements show the following:

A

Z

Total

Sales

$700,000

$175,000

$875,000

Cost of goods sold

461,300

125,100

586,400

Gross profit

238,700

49,900

288,600

Operating expenses

Direct expenses

Advertising

27,000

3,000

30,000

Store supplies used

5,600

1,400

7,000

Depreciation - store equipment

14,000

7,000

21,000

Total direct expenses

46,600

11,400

58,000

Allocated expenses

Sales salaries

70,200

23,400

93,600

Rent expense

22,080

5,520

27,600

Bad debts expense

21,000

4,000

25,000

Office salary

20,800

5,200

26,000

Insurance expense

4,200

1,400

5,600

Miscellaneous office expense

1,700

2,500

4,200

Total allocated expenses

139,980

42,020

182,000

Total expenses

186,580

53,420

240,000

Net income (loss)

$52,120

$(3,520)

$48,600

The plant controller provided the following additional information:

The company has one office worker who earns $500 per week, or $26,000 per year, and four salesclerks who each earns $450 per week, or $23,400 per year for each salesclerk.

The full salaries of three salesclerks are charged to Department A.The full salary of one salesclerk is charged to Department Z.

Eliminating Department Z would avoid the sales salaries but not the office salary currently allocated to it.

The store building is rented under a long-term lease that cannot be changed.Therefore, Department A will use the space and equipment currently utilized by Department Z.

Closing Department Z will eliminate its expenses for advertising, bad debts, and store supplies; 65% of the insurance expense allocated to it to cover its merchandise inventory; and 30% of the miscellaneous office expenses presently allocated to it.

Required

Should Acme Manufacturing eliminate product Z?Show detailed calculations to support your decision.

Part B

Wally World manufactures cross country skis.Its cost of manufacturing 5,000 bindings is as follows:

Direct materials

$42,000

Direct labor

8,500

Variable overhead

5,000

Fixed overhead

16,000

Total manufacturing costs for 5,000 bindings

$71,500

Wally World can purchase bindings from another manufacturer for $11.00 each.They would pay an additional $1.25 per unit to have the bindings shipped to its manufacturing plant.They would add their logo to each binding for an additional $0.70 per unit.If Wally World purchases the bindings they can avoid fixed overhead costs of $7,500.

Required

Should Wally World continue to manufacture the bindings or purchase them from the other manufacturer?Show detailed calculations to support your decision.