The Smith Company has three departments: X, Y, and Z. Smiths accountant prepared an income statement for the entire company and it showed that the company earned $20,000. Then the accountant prepared an income statement for each of the three departments. Department X and Y both earned a profit. Department Z, however, APPEARS to have lost $7,000.

Since Department Z APPEARS to be losing money, should Smith get rid of Department Z or should Smith keep Department Z? Shown below is information to help you make that decision.

Department Z currently has two employees. One of those employees is the presidents son who earns $9,000 per year. The other employee is a nobody who earns $3,000 per year. If Department Z is eliminated, one of these employees will be fired and the other will be transferred to another department earning the same amount he earned while working in Department Z. You figure out who will be fired and who will be transferred.

Rent expense for the entire building is $20,000. Of that amount, $6,000 has been allocated

to Department Z. The rent on the entire building will be remain the same regardless of

what happens to Department Z.

The total amount spent for advertising was $12,000; $4,000 for each of the three

departments. Regardless of what happens to department Z, Smith will continue to spend

$4,000 to advertise department X and $4,000 to advertise Department Y. (Hint: Are you going

to continue to advertise a department that no longer exists?)

The cost of ensuring the entire building is $30,000. Of that amount, $5,000 was allocated to department Z. An additional $2,000 was the cost of insurance premiums to insure department Zs inventory. The cost of ensuring the building will still be $30,000 regardless of what happens to department Z. (Hint: Are you going to continue to pay premiums to insure an inventory which no longer exist?)

Department Zs sales were $100,000 and its Cost of Goods Sold were $60,000.

A. Four of the above costs will disappear if Department Z is dropped. Write down those four costs in the space provided below. Dont write down the name of the cost, write down the AMOUNT of the cost that will disappear. For example, dont say salaries, write down the amount of salaries that will disappear.

B. Regardless of your answer to part A, pretend that $90,000 of costs will disappear if department Z is dropped. If Department Z is dropped, will Smiths total net income increase or decrease?

C. Still using the $90,000 pretend figure, by what amount will Smiths total net income increase or decrease if Department Z is dropped?