Computer Village 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 Computer Village 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 14.00 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales.
| Computer Equipment |
Home Office Furniture |
Total | |||||
| Sales | $1,450,000 | $1,116,500 | $2,566,500 | ||||
| Less cost of goods sold | 942,500 | 812,000 | 1,754,500 | ||||
| Contribution margin | 507,500 | 304,500 | 812,000 | ||||
| Less direct fixed costs: | |||||||
| Salaries | 177,625 | 177,625 | 355,250 | ||||
| Other | 55,825 | 55,825 | 111,650 | ||||
| Less allocated fixed costs: | |||||||
| Rent | 13,260 | 10,210 | 23,470 | ||||
| Insurance | 3,110 | 2,530 | 5,640 | ||||
| Cleaning | 3,850 | 3,150 | 7,000 | ||||
| President’s salary | 73,290 | 56,510 | 129,800 | ||||
| Other | 67,010 | 5,300 | 72,310 | ||||
| Net income / (loss) | $113,530 | $(6,650) | $106,880 | ||||
Determine whether Computer Village should discontinue the furniture line and the financial benefit (cost) of dropping it.
Net income without Home Office Furniture is $ . The company should dropshould not dropshould be indifferent between dropping or not dropping the Home Office Furniture product line. |
| % | Computer | ||
| Equipment | |||
| Sales | 100% | $1,450,000 | |
| Less cost of goods sold | 65% | 942,500 | |
| Contribution margin | 35% | 507,500 | |
| Less direct fixed costs: | |||
| Salaries | 12.25% | 177,625 | |
| Other | 3.85% | 55,825 | |
| Less allocated fixed costs: | |||
| Rent | 0.91% | 13,260 | |
| Insurance | 0.21% | 3,110 | |
| Cleaning | 0.27% | 3,850 | |
| President’s salary | 5.05% | 73,290 | |
| Other | 4.62% | 67,010 | |
| Net income / (loss) | 7.87% | $113,530 | |
When we dropp the Home office furniture option the income will be as follow
| Computer | ||||
| Equipment | Explaination | |||
| Sales | 100% | $1,653,000 | 14% increase in sale | |
| Less cost of goods sold | 65% | 1,074,450 | 65% of sale | |
| Contribution margin | 35% | 578,550 | 35% of sale | |
| Less direct fixed costs: | ||||
| Salaries | 177,625 | Only for computer equipment | ||
| Other | 55,825 | Only for computer equipment | ||
| Less allocated fixed costs: | ||||
| Rent | 23,470 | This fixed cost and not change | ||
| Insurance | 5,640 | This fixed cost and not change | ||
| Cleaning | 7,000 | This fixed cost and not change | ||
| President’s salary | 129,800 | This fixed cost and not change | ||
| Other | 72,310 | This fixed cost and not change | ||
| Net income / (loss) | $106,880 | |||
Based on given assumptions, net income will not change. Therefore, the company should be indifferent between dropping or not dropping the Home Office Furniture product line. However, strategic and other qualitative factors should also be considered.
