Han Products manufactures 40,000 units of part S-6 each year foruse on its production line. At this level of activity, the cost perunit for part S-6 is:

Direct materials	$	3.30
Direct labor		12.00
Variable manufacturing overhead		2.70
Fixed manufacturing overhead		6.00
Total cost per part	$	24.00

An outside supplier has offered to sell 40,000 units of part S-6each year to Han Products for $22 per part. If Han Products acceptsthis offer, the facilities now being used to manufacture part S-6could be rented to another company at an annual rental of $90,000.However, Han Products has determined that two-thirds of the fixedmanufacturing overhead being applied to part S-6 would continueeven if part S-6 were purchased from the outside supplier.

Required:

What is the financial advantage (disadvantage) of accepting theoutside supplier’s offer?

Bed & Bath, a retailing company, has twodepartments—Hardware and Linens. The company’s most recent monthlycontribution format income statement follows:

				Department
	Total			Hardware			Linens
Sales	$	4,160,000		$	3,140,000		$	1,020,000
Variable expenses		1,287,000			880,000			407,000
Contribution margin		2,873,000			2,260,000			613,000
Fixed expenses		2,210,000			1,370,000			840,000
Net operating income (loss)	$	663,000		$	890,000		$	(227,000	)

A study indicates that $374,000 of the fixed expenses beingcharged to Linens are sunk costs or allocated costs that willcontinue even if the Linens Department is dropped. In addition, theelimination of the Linens Department will result in a 15% decreasein the sales of the Hardware Department.

Required:

What is the financial advantage (disadvantage) of discontinuingthe Linens Department?

mperial Jewelers manufactures and sells a gold bracelet for$408.00. The company’s accounting system says that the unit productcost for this bracelet is $267.00 as shown below:

Direct materials	$	145
Direct labor		89
Manufacturing overhead		33
Unit product cost	$	267

The members of a wedding party have approached Imperial Jewelersabout buying 27 of these gold bracelets for the discounted price of$368.00 each. The members of the wedding party would like specialfiligree applied to the bracelets that would require ImperialJewelers to buy a special tool for $467 and that would increase thedirect materials cost per bracelet by $13. The special tool wouldhave no other use once the special order is completed.

To analyze this special order opportunity, Imperial Jewelers hasdetermined that most of its manufacturing overhead is fixed andunaffected by variations in how much jewelry is produced in anygiven period. However, $14.00 of the overhead is variable withrespect to the number of bracelets produced. The company alsobelieves that accepting this order would have no effect on itsability to produce and sell jewelry to other customers.Furthermore, the company could fulfill the wedding party’s orderusing its existing manufacturing capacity.

Required:

1. What is the financial advantage (disadvantage) of acceptingthe special order from the wedding party?

2. Should the company accept the special order?