In: Accounting
Furniture Classics makes outdoor furniture from aged wood. The company’s primary product lines are chairs and tables.
Below is data for the recent quarter:
Chairs |
Tables |
Total |
|
Quantity sold |
8,000 |
1,500 |
|
Revenue |
$800,000 |
$375,000 |
$1,175,000 |
Direct materials |
288,000 |
140,625 |
428,625 |
Direct labor |
192,000 |
46,875 |
238,875 |
Contribution margin |
$320,000 |
$187,500 |
$507,500 |
Traceable fixed costs |
125,000 |
100,000 |
225,000 |
Allocated fixed costs |
75,000 |
75,000 |
150,000 |
Profit before taxes |
$120,000 |
$12,500 |
$132,500 |
To encourage sales of tables, management is considering rewarding the salesperson who sells the most tables in each quarter with an all-expense paid vacation for two in Hawaii. This incentive is expected to increase the sales of tables by 288 each quarter. The cost of the Hawaii vacation is estimated to be $6,000.
Solution:
Chairs: As given in current data there is profit before taxes is $120,000, further Allocated fixed cost will also incurred even if discontinue the table so Net increase in profit before taxes is $120,000 + $75,000 = $ 195,000
So it is better to continue to chairs
Tables: As given in current data there is profit before taxes is $12,500, further Allocated fixed cost will also incurred even if discontinue the table so Net increase in profit before taxes is $12,500 + $75,000 = $ 87,500
So it is better to continue to tables
There is $ 6,000 estimated cost of incentive. to cover $6,000 cost it needs to generate additional contribution of $6,000.
Particulars | Total on 1500 table | Per table |
Revenue | 375,000 | 250 |
Direct Cost | 187,500 | 125 |
Contribution | 187,500 | 125 |
per table contribution is 125 so total $6,000 / 125 = 48 additional table required to sale for justify the incentive.
For changes in profit before tax we will calcute diffrence between current Contribution and projected contribution (Expected sales & Incentive cost).
Particulars | On 1500 table |
On 1788 table (1500+288) |
Increase |
Revenue | 375,000 | 447,000 | |
Direct Cost | 187,500 | 223,500 | |
Contribution | 187,500 | 223,500 | |
Incentive cost | 6,000 | ||
Net impact | 187,500 | 217,500 | 30,000 |
On the above table it is clear that there is net increase of $30,000. So there is net increase in profit before tax is $30,000.
Note: We have not taken Traceble and Allocable fixed cost as they remain same.