Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / A retail furniture company currently sells products in four categories; recliners, sofas, dining sets, and patio

A retail furniture company currently sells products in four categories; recliners, sofas, dining sets, and patio

Marketing

A retail furniture company currently sells products in four categories; recliners, sofas, dining sets, and patio.

Due to recent poor performance, the company is considering eliminating the patio furniture line.

 

  Recliners Sofas Dining Patio
Sales $500,000 $700,000 $900,000 $400,000
Variable expenses 200,000 375,000 405,000 330,000
Allocated fixed expenses 200,000 280,000 360,000 160,000
Operating income $100,000 $45,000 $135,000 $(90,000)

If patio furniture is eliminated, 80% of the fixed costs assigned to the product line could be avoided. The company does experience cross-sales opportunities and estimates eliminating the patio furniture will lead to a 5% decrease in unit sales of each of the other three product line.

The company should

A. Eliminate the patio furniture line, which will increase the company's operating income by $2,000.

B. Keep the patio furniture line because eliminating it will decrease the company's operating income by $67,000.

C. Eliminate the patio furniture line, which will increase the company's operating income by $38,000.

D. Keep the patio furniture line because eliminating it will decrease the company's operating income by $94.000.

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

Correct answer: Option A) Eliminate the patio furniture line, which will increase the company's operating income by $2,000.

Explanation:

The first step is to determine the contribution margin of each product:

 

  Recliners Sofas Dining Patio
Sales $500,000 $700,000 $900,000 $400,000
Variable expenses 200,000 375,000 405,000 330,000
Contribution margin $300,000 $325,000 $495,000 $70,000

The second step is to determine the net benefit:

If patio is discontinued:

 

  Amount
Savings in fixed costs ($160,000 * 80%) $128,000
Lost contribution margin from Patio ($70,000)
Lost contribution margin from the other three units (($300,000 + $325,000 + $495,000) * 5%) ($56,000)
Net benefit/ Increase in overall operating income $2,000

Related Questions