Computer Boutique sells

1)     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

We make an analysis with the line and without the line

 With Furniture Without Line Furniture Sales 2,000,000 1,356,000 (1,200,000 X 13% Less cost of goods sold 1,200,000 791,000 (700,000 X 13%) Contribution margin 800,000 565,000 Less direct fixed costs: Salaries 350,000 175,000 Other 120,000 60,000 Less allocated fixed costs: Rent 24,000 24,000 Insurance 6,000 6,000 Cleaning 7,000 7,000 President’s salary 130,000 130,000 Other 12,000 12,000 Total costs 649,000 414,000 Net Income 151,000 151,000

With the furniture line we have the net income as given for the total. If the furniture line is discontinued, all sales, variable costs and direct fixed costs would also be eliminated. The sales will be now of Computer equipment and will be higher by 13%. The contribution margin will also be higher by 13%. The direct fixed costs would for Computer equipment. The allocated fixed costs would be the same as total since these costs will remain the same.

As we can see from the analysis, the net income is the same under both the options. There will be no effect on profits of dropping the Furniture line.

2)     Beach Rentals has estimated that fixed costs per month are \$79,200 and variable cost per dollar of sales is \$0.52.

(a) What is the break-even point per month in sales?

Breakeven sales = Fixed cost/contribution margin ratio

Contribution margin ratio = 1-variable cost = 1-0.52 = 0.48

Breakeven sales = 79,200/.48 = \$165,000

(b) What level of sales is needed for a monthly profit of \$24,000?

Sales needed for monthly profit = (Fixed cost + desired profit)/contribution margin ratio

=(79,200 + 24,000)/0.48

= \$215,000
(c) For the month of July, the company anticipates sales of \$240,000. What is the expected level of profit?

Profit = Contribution margin – fixed cost

= 240,000 X 0.48 – 79,200

= \$36,000

3)     Peak Manufacturing produces snow blowers. The selling price per snow blower is \$100. Costs involved in production are:

 Direct Material per unit \$20 Direct Labor per unit 12 Variable manufacturing overhead per unit 10 Fixed manufacturing overhead per year \$148,500

In addition, the company has fixed selling and administrative costs of \$150,000 per year. During the year, Peak produces 45,000 snow blowers and sells 30,000 snow blowers. How much is net income using full costing?
\$1,641,000
\$1,590,000
\$1,441,500
\$1,491,000

Fixed manufacturing cost per unit = 148,500/45,000 units produced = 3.3

Total manufacturing cost = 20+12+10+3.3 = 45.30

The net income is

 Sales (30,000 X \$100) 3,000,000 Cost of goods sold (30,000 X 45.3) 1,359,000 Gross Profit 1,641,000 Selling and admn cost 150,000 Net Income 1,491,000