Question

Frieda Falcon 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

All variable costs are product specific.  Allocated GS&A costs are corporate costs allocated to individual products based on units sold.  Marketing and Engineering costs are product specific.  The company’s management is concerned about the profitability of lamps.  The company is considering two options:

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).

First, consider the two options independently.  

Option #1 Part 1:  Based on the numbers, should the company eliminate lamps?  Calculate the differential income. Show your work and highlight your answers. Work:
Eliminate Lamps? YES                NO	If eliminated income will:   Increase       Decrease	Dollar amount of Increase/(Decrease) in income if eliminated:

Option #1 Part 2a:  What qualitative factors should be considered in the decision of whether to eliminate lamp production?  List your qualitative factors below.

Option #1 Part 2b:  Will these qualitative factors change the decision indicated by the elimination calculation above? Why or why not?

Option #2 Part 1:  Based on the numbers, should the company outsource lamps?   Calculate the differential income. Show your work and highlight your answers. Work:
Outsource Lamps? YES                NO	If outsourced income will:   Increase       Decrease	Dollar amount of Increase/(Decrease) in income if outsourced:

Option #2 Part 2a:  What qualitative factors should be considered in the decision of whether to outsource lamp production?  List your qualitative factors below

Option #2 Part 2b:  Will these qualitative factors change the decision indicated by the outsourcing calculation above? Why or why not?

Finally, consider all options together.  What should the company do? (Highlight one)

Nothing. Keep current structure.                                     Outsource lamp production.

Eliminate lamp production.                                             Other (explain below)

Explain your selection:

Answer 1