Question

In: Accounting

Furniture Classics makes outdoor furniture from aged wood. The company’s primary product lines are chairs and...

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.

  1. Based on the current data, should either product be discontinued?
  2. How many additional tables need to be sold each quarter to justify the incentive?
  3. Based on these additional units and the incentive trip, what is the expected increase to profit before taxes for each quarter?

Solutions

Expert Solution

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.


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