Question

Hiroole sells computer equipment and home office furniture. Currently the furniture product line takes up approximately 50 percent of the company’s retail floor space. The president of Hiroole is trying to decide whether the company should continue offering furniture or concentrate on computer equipment. Below is a product line income statement for the company. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales.

			Computer Equipment		Home Office Furniture		Total
Sales			$1,405,000		$1,081,850		$2,486,850
Less cost of goods sold			913,250		786,800		1,700,050
Contribution margin			491,750		295,050		786,800
Less direct fixed costs:
	Salaries		172,113		172,113		344,226
	Other		59,010		59,010		118,020
Less allocated fixed costs:
	Rent		12,710		9,619		22,329
	Insurance		3,490		2,745		6,235
	Cleaning		3,700		2,792		6,492
	President’s salary		75,020		57,162		132,182
	Other		7,250		5,360		12,610
Net income / (loss)			$158,457		$(13,751)		$144,706

Determine whether Hiroole should discontinue the furniture line and the financial benefit (cost) of dropping it.

Net income without Home Office Furniture is $ . The company should dropshould not dropshould be indifferent between dropping or not dropping the Home Office Furniture product line.

Answer 1

Answer:
Total Direct Fixed Costs                 = $ 172,113 + $ 59,010                 =    $ 231,123
Total Allocated Fixed Costs             =   22,329 + 6,235 + 6,492 132,182 + 12,610             =   $ 179,848
Net income without Home Office Furniture              = Contribution Margin lost on Discontinuing                                    (-) Direct Fixed Costs (-) Allocated Fixed Costs              =   ( $ 491,750 + 13% ) (-) $ 231,123 (-) $ 179,848              =    $ 555,677.50 (-) $ 231,123 (-) $ 179,848              =    $ 144,706	$ 144,706
Should be indifferent between dropping or not dropping the Home Office Furniture product line