Question

Practice Exercise 2

Foress 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 Foress 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 14 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales.

			Computer Equipment		Home Office Furniture		Total
Sales			$1,440,000		$1,108,800		$2,548,800
Less cost of goods sold			936,000		806,400		1,742,400
Contribution margin			504,000		302,400		806,400
Less direct fixed costs:
	Salaries		176,400		176,400		352,800
	Other		55,440		55,440		110,880
Less allocated fixed costs:
	Rent		13,820		11,112		24,932
	Insurance		3,690		2,824		6,514
	Cleaning		4,280		3,057		7,337
	President’s salary		76,080		61,786		137,866
	Other		6,960		5,372		12,332
Net income / (loss)			$167,330		$(13,591)		$153,739

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

Net income without Home Office Furniture is $?

The company (Should drop / Should not drop / Should be indifferent) the Home Office Furniture product line.

Answer 1

	Home Office Furniture
Contribution Margin		$        302,400
Less: Direct Fixed Cost
Salaries	$            176,400
Other	$              55,440	$        231,840
Direct Contribution		$          70,560
Evaluation of Option
Increase in contribution of Computer Equipment @ 14%		$          70,560	= 504000 * 14%
Savings
Direct Fixed Cost
Salaries	$            176,400
Other	$              55,440	$        231,840
		$        302,400
Less: Direct Contribution lost from Home Office Furniture		$          70,560
Net Benefit		$        231,840

Therefore, as the net benefit from dropping the furniture line is more, the product line of Home Office Furniture should be dropped.