Whirlwind Industries is a multiproduct company with several manufacturing plants. The Brownwood Plant manufactures and distributes two carpet cleaning products, Household and Commercial, under the Karpet Kleen label. The forecasted operating results for the fiscal year ending June 30th are presented below:

Karpet Kleen -- Brownwood Plant Forecasted Result of Operations For the year ended June 30 (in thousands)

Household /Commercial /Total

Total Units 100,000/ 100,000/ 200,000

Sales Revenue $ 4,000,000/ $ 6,000,000/ $10,000,000

Cost of goods sold 3,200,000/ 3,800,000/ 7,000,000

Gross profit $ 800,000/ $ 2,200,000/ $ 3,000,000

Selling & admin. expenses Variable $ 800,000/ $ 1,400,000 /$ 2,200,000

Fixed* 480,000/ 720,000/ 1,200,000

Total selling & admin. Expenses $ 1,280,000/ $ 2,120,000/ $ 3,400,000

Income (loss) before taxes $ (480,000)/ $ 80,000/ $ (400,000)

*Fixed selling and administrative expenses are allocated between the two products on the basis of relative sales dollars. These expenses are avoidable only if the entire plant is closed.

The product costs per unit are as follows:

Household /Commercial

Direct materials $14 /$16

Direct labor 8/ 8

Variable manufacturing overhead 2/ 4

Fixed manufacturing overhead 8 /10

Total product cost $32/ $38

Each product is manufactured on a separate production line. Normal manufacturing capacity is 100,000 cases of each product per year. However, the plant is capable of producing 125,000 cases of the Household product and 175,000 cases of the Commercial product per year.

Other information: Fixed manufacturing overhead per unit is based on normal manufacturing capacity. Depreciation constitutes 50% of the fixed manufacturing overhead cost of each product and is unavoidable. The remaining fixed manufacturing overhead expenses arise from factory personnel assigned to particular products. Variable selling and administrative expenses are $8 and $14 per unit, respectively, for the Household and Commercial products.

Required:

A) Several members of top management believe that the losses incurred overall by the company are a result of the Household product and they would like to eliminate the Household product and focus only on the Commercial product. Based on the information provided, do you agree or disagree with this proposal? Prepare a segment margin income statement in good form to support your analysis.

B) Management has received a special order from CleanMe Corporation for 40,000 cases of the Commercial product at a price of $40 per case. No sales commissions would need to be paid (sales commissions are normally $6.40 per case.) Should they accept this order? Support your answer with calculations and comment on the qualitative considerations.

C) MakeIt Corporation has offered to make Karpet Kleens Household product for $26 per case. Karpet Kleen would still sell the product to its customers. The company could use its idle resources to make a new Extra Strength product. Management believes the company could sell 45,000 cases of this new product for $80 per case. Variable selling and administrative expenses would be $14 per case and variable production costs would be $58 per case. Should Karpet Kleen outsource the Household product and make the Extra Strength product? Support your answer with calculations and comment on the qualitative considerations.

Hint: Calculate the contribution margin for each product under this proposal and then find the change in income.