Question

Uli sells computer equipment and home office furniture. Currently the furniture product line takes up approximately...

Uli 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 Uli 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 $1,425,000 $1,097,250 $2,522,250
Less cost of goods sold 926,250 798,000 1,724,250
Contribution margin 498,750 299,250 798,000
Less direct fixed costs:
Salaries 179,550 179,550 359,100
Other 59,850 59,850 119,700
Less allocated fixed costs:
Rent 12,790 10,889 23,679
Insurance 3,440 2,739 6,179
Cleaning 4,110 3,139 7,249
President’s salary 67,110 58,415 125,525
Other 6,400 5,358 11,758
Net income / (loss) $165,500 $(20,690) $144,810


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

Net income without Home Office Furniture is $ . The company

should not dropshould be indifferent between dropping or not droppingshould drop

the Home Office Furniture product line.

Homework Answers

Answer #1
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Uli Amount $
Contribution margin of department Computer 498,750.00
Increase by 12%     59,850.00
Fixed expenses- Salaries 179,550.00
Fixed expenses- Other      59,850.00
Savings in fixed expenses of department Home Office 119,700.00
Contribution margin lost of department Home Office 299,250.00
Les: Contribution margin gain of department Computer A      59,850.00
Less: Savings in fixed expenses of department B 119,700.00
Net income will decrease by 119,700.00
As Net income will decrease by $ 119,700 so the division should not be dropped.
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