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

 

 

 

 

 

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