Exercise 7-1 (15 minutes) Case 1 Case 2 Item Relevant Not Relevant Relevant Not Relevant
a. Sales revenue X X
b. Direct materials X X
c. Direct labor X X
d. Variable manufacturing overhead X X
e. Book value—Model A3000 machine X X
f. Disposal value—Model A3000 machine X X
g. Depreciation—Model A3000 machine X X
h. Market value—Model B3800 machine (cost) X X
i. Fixed manufacturing overhead X X
j. Variable selling expense X X
k. Fixed selling expense X X
l. General administrative overhead X X

Exercise 7-2 (30 minutes) 1. No, the housekeeping program should not be discontinued. It is actually generating a positive program segment margin and is, of course, providing a valuable service to seniors. Computations to support this conclusion follow:

Contribution margin lost if the housekeeping program is dropped $(80,000) Fixed costs that can be avoided: Liability insurance $15,000 Program administrator’s salary 37,000 52,000 Decrease in net operating income for the organization as a whole $(28,000)

Depreciation on the van is a sunk cost and the van has no salvage value since it would be donated to another organization. The general administrative overhead is allocated and none of it would be avoided if the program were dropped; thus it is not relevant to the decision.

The same result can be obtained with the alternative analysis below:

Current Total Total If House-keeping Is Dropped Difference: Net Operating Income Increase or (Decrease) Revenues $900,000 $660,000 $(240,000) Variable expenses 490,000 330,000 160,000 Contribution margin 410,000 330,000 (80,000) Fixed expenses: Depreciation* 68,000 68,000 0 Liability insurance 42,000 27,000 15,000 Program administrators’ salaries 115,000 78,000 37,000 General administrative