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Boutique sells computer equipment and home office furniture. Currently, the furniture product line takes up approximately 50% of the company’s retail floor space. The president of
Boutique is trying to decide whether the company should continue offering furniture or just concentrate on computer equipment. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13%. Allocated fixed costs are assigned based on relative sales.
|
Home Office |
||||
|
Equipment |
Furniture |
Total |
||
|
Sales |
$ 1,200,000 |
$ 800,000 |
$2,000,000 |
|
|
Less cost of goods sold |
700,000 |
500,000 |
1,200,000 | |
|
Contribution margin |
300,000 |
800,000 | ||
|
Less direct fixed costs: |
||||
|
Salaries |
175,000 |
350,000 |
||
|
Other |
60,000 |
120,000 |
||
|
Less allocated fixed costs: |
||||
|
Rent |
14,118 |
9,882 |
24,000 |
|
|
Insurance |
3,529 |
2,471 |
6,000 |
|
|
Cleaning |
4,117 |
2,883 |
7,000 |
|
|
President’s salary |
76,470 |
53,350 |
130,000 |
|
|
7,058 |
4,942 |
12,000 |
||
|
Total costs |
340,292 |
380,708 |
649,000 |
|
|
Net Income |
$159,708 |
($ 8,708) |
$151,000 |
|
Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line
