Practice Exercise 2 Foress sells computer equipment and home office furniture. C
ID: 2557221 • Letter: P
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.
$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 $?
ComputerEquipment 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
Explanation / Answer
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.
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
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