Question

Johnson Fine Furniture produces elegant, high quality, hand-crafted wood furniture. The company is well known for its superior craftsmanship. The company had the following results during its most recent fiscal year:

	Coffee Tables	End Tables	Lamps	Totals
Units	1,700	2,300	2,000	6,000
Sales Revenue	$ 2,125,000	$ 2,070,000	$     280,000	$ 4,475,000
Variable Costs
Materials & Labor	1,360,000	1,495,000	220,000	$ 3,075,000
Overhead	255,000	184,000	50,000	$     489,000
Contribution Margin	$     510,000	$     391,000	$       10,000	$     911,000
Fixed Costs
Allocated GS&A	103,700	140,300	122,000	$     366,000
Marketing & Engineering	68,000	46,000	31,000	$     145,000
Income (Loss)	$     338,300	$     204,700	$    (143,000)	$     400,000

Option #1: Eliminate lamp production and sales. Assume elimination of the lamps will not impact the sales of other products.

Option #2: Purchase the lamps from an outside supplier. SuperCheap Lamps, Inc. has offered to sell lamps to the company for $132 per lamp. If lamp production is outsourced, $6,000 of the Marketing & Engineering costs are avoidable (the company will still have $25,000 of lamp marketing costs).

1. Based on the numbers, should the company eliminate lamps? Calculate the differential income

2. What qualitative factors should be considered in the decision of whether to eliminate lamp production?

3. Based on the numbers, should the company outsource lamps? Calculate the differential income

4. What qualitative factors should be considered in the decision of whether to outsource lamp production?

5. Will these qualitative factors change the decision indicated by the outsourcing calculation above?

Why or why not?

Show work for all. Thanks! :)

Answer 1

1. The company should eleimiate Lamps as this will increase Income by $ 21,2000

	Coffee Tables	End Tables	Lamps	Totals
Units	1,700	2,300		4,000
Sales Revenue	$2,125,000	$2,070,000		$     4,195,000
Variable Costs
Materials & Labor	1,360,000	1,495,000		$     2,855,000
Overhead	255,000	184,000		$        439,000
Contribution Margin	$510,000	$391,000		$        901,000
Fixed Costs
Allocated GS&A	103,700	140,300	122,000	$        366,000
Marketing & Engineering	68,000	46,000		$        114,000
Income (Loss)	$338,300	$204,700	($122,000)	$        421,000

2. (1)One needs to ensure that such elimination doesnot impact the sales of other products

(2) Shut down cost of the product needs to be considered if any and such shall not exceed the benefit.

(3) If employees of Lamps department are fired, the same can impact the morale of emplyees of other two department as well  

3. Outsourcing will increase the income by $12,000

	Coffee Tables	End Tables	Lamps	Totals
Units	1,700	2,300	2,000	6,000
Sales Revenue	$2,125,000	$2,070,000	$280,000	$     4,475,000
Variable Costs
Materials & Labor / Purchase	1,360,000	1,495,000	264,000	$     3,119,000
Overhead	255,000	184,000		$        439,000
Contribution Margin	$510,000	$391,000	$16,000	$        917,000
Fixed Costs
Allocated GS&A	103,700	140,300	122,000	$        366,000
Marketing & Engineering	68,000	46,000	25,000	$        139,000
Income (Loss)	$338,300	$204,700	($131,000)	$        412,000

4. (1) The cost of outsourcing may increase in future causing loss

(2) The timely availablity of the product is important

(3) If the quality of the product is degraded, it may hamper the sale.

5. Yes, these qualitative factors may impact the decision making.