A merchandising company has two departments, Gadgets and Gizmos. A recent monthly income statement for the company

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Question:

A merchandising company has two departments, Gadgets and Gizmos. A recent monthly income statement for the company follows:

Department

Total Gadgets Gizmos

Sales $ $1, 190, 000$ $ $750, 000$ $ $440, 000$

Less variable expenses $650, 000 430, 000 220, 000$

Contribution margin $540, 000 320, 000 220, 000$

Less fixed expenses $460, 000 230, 000 230, 000$

Net operating income $($ loss $)$ $ $80, 000$ $ $90, 000 -$ $ $10, 000$

A study indicates that $ $95, 000$ of the fixed expenses being charged to Gizmos are sunk costs or allocated costs that will continue even if Gizmos is dropped. In addition, the elimination of Gizmos will result in a $15 %$ increase in the sales of Gadgets.

Required:

If Gizmos is dropped, what will be the effect on the net operating income of the company as a whole? Would you recommend Gizmos be dropped? Briefly explain why.

Part B $.$

Our company produces several products from a base, J $5 -$ ABC. Material and processing costs for the base product total $ $5, 000$ per tonne $($ per $1, 000$ kg $) .$ J $5 -$ ABC can either be sold at the split $-$ off point or processed further. Further processing using a tonne of J $5 -$ ABC will cost $ $8, 100$ and produce $900$ kg of J $5 - 123$ that sells for $ $26 /$ kg $.$ Prior to further processing, the $1, 000$ kg of J $5 -$ ABC can sell for $ $12 /$ kg $.$