Computer Boutique sells computer equipment and home office furniture. Currently,

Question

Computer 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 Computer 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. Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line.

Explanation / Answer

Computer Home Office Total Equip Furniture Sales 1,200,000 800,000 2,000,000 Less Cost of Goods Sold 700,000 500,000 1,200,000 Contribution Margin 500,000 300,000 800,000 Less Direct fixed Cost: Salaries 175,000 175,000 350,000 Other 60,000 60,000 120,000 Less Allocated fixed cost: Rent 14,118 9,882 24,000 Insurance 3,529 2,471 6,000 Cleaning 4,117 2,883 7,000 Presidents Salary 76,470 53,350 130,000 Other 7,058 4,942 12,000 Total COst 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..

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