Question

Bellevue 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 Bellevue 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 12 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales.

			Computer Equipment		Home Office Furniture		Total
Sales			$1,410,000		$1,085,700		$2,495,700
Less cost of goods sold			916,500		789,600		1,706,100
Contribution margin			493,500		296,100		789,600
Less direct fixed costs:
	Salaries		177,660		177,660		355,320
	Other		59,220		59,220		118,440
Less allocated fixed costs:
	Rent		14,070		11,274		25,344
	Insurance		3,480		2,779		6,259
	Cleaning		3,620		3,217		6,837
	President’s salary		73,290		56,689		129,979
	Other		6,060		5,533		11,593
Net income / (loss)			$156,100		$(20,272)		$135,828

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

1. Net income without Home Office Furniture is $ . 2.The company

A. should be indifferent between dropping or not dropping

B. should not drop

C. should drop

the Home Office Furniture product line.

Answer 1

Answer:

1) Net Contribution Margin From Furniture:

Sales	$ 1,085,700
Less cost of goods sold	($789,600)
Contribution margin	$296,100
Less: direct fixed costs
Salaries	($177,660)
Other	($59,220)
Net Contribution Margin From Furniture:	$59,220

2) Computer Equipment 13% Increase:

		12% Increase
Sales	$ 1,410,000*12%)	$ 169,200
Less cost of goods sold	($916,500 *12%)	($109,980)
Contribution margin	$493,599	$59,220

( Fixed cost is not affected so, its not cônsidered in above calculation.)

3) A. should be indifferent between dropping or not dropping

(As the outcome is keeping the furniture line creates $59,220 and dropping the furniture line and expanding PC deals 13% likewise has an estimation of $59,220)