Computer Boutique sells computer equipment and home office furniture. Currently, the furniture product line takes up approximately 50% of the company’s retail floor space. The president of Computer Boutique is trying to decide whether the company should continue offering furniture or just concentrate on computer equipment. If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of computer equipment can increase by 13%. Allocated fixed costs are assigned based on relative sales.
Computer
Home Office
Equipment
Furniture
Total
Sales
$1,200,000
$800,000
$2,000,000
Less cost of goods sold
700,000
500,000
1,200,000
Contribution margin
500,000
300,000
800,000
Less direct fixed costs:
Salaries
175,000
175,000
350,000
Other
60,000
60,000
120,000
Less allocated fixed costs:
Rent
14,118
9,882
24,000
Insurance
3,529
2,471
6,000
Cleaning
4,117
2,883
7,000
President’s salary
76,470
53,350
130,000
Other
7,058
4,942
12,000
Total costs
340,292
380,708
649,000
Net Income
$159,708
($ 8,708)
$151,000
Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line.
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