Question

Macaron 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 Macaron 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.

			Computer Equipment		Home Office Furniture		Total
Sales			$1,400,000		$1,078,000		$2,478,000
Less cost of goods sold			910,000		784,000		1,694,000
Contribution margin			490,000		294,000		784,000
Less direct fixed costs:
	Salaries		171,500		171,500		343,000
	Other		53,900		53,900		107,800
Less allocated fixed costs:
	Rent		14,020		10,734		24,754
	Insurance		3,160		2,567		5,727
	Cleaning		4,120		3,239		7,359
	President’s salary		70,540		55,692		126,232
	Other		7,170		4,953		12,123
Net income / (loss)			$165,590		$(8,585)		$157,005

Determine whether Macaron should discontinue the furniture line and the financial benefit (cost) of dropping it.

Net income without Home Office Furniture is $_____

The company Should Drop, Should Not Drop or Should be indifferent between dropping or not dropping? the Home Office Furniture product line.

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Answer 1

					Present (Alternative 1)	Dropping furniture line (Alternative 2)	Financial benefit (cost) on alternative 2
	Sales				2478000	1596000	-882000
						(1400000*114%)
	Less: Cost of goods sold				1694000	1037400	656600
						(910000*114%)
	Contribution margin				784000	558600	-225400
	Less: Direct fixed cost;
	Salaries				343000	171500	171500
	Other				107800	53900	53900
	Less: allocated fixed costs;
	Rent				24754	24754	0
	Insurance				5727	5727	0
	Cleaning				7359	7359	0
	President's salary				126232	126232	0
	Other				12123	12123	0
	Net income/(loss)				157005	157005	0
	Net income without home office furniture=$ 157005
	The company should be indifferent between dropping or not dropping since financial benefit on droppping furniture line=0.