Computer village sells computer equipment
Computer Village 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 Computer village is trying to decided 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 13 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative salaries.
Computer Equipment Home Furniture Office 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 cost:
Rent $14,118 $9,882 $24,000
Insurance $3,529 $2,471 $6,000
Cleaning $4,117 $2,883 $7,000
President's Salary $76,740 $53,530 $130,000
Other $7,058 $4,942 $12,0000
Net Income: $159,708 ($8,708) $151,000
Required
Determine whether Computer Villages should discontinue the furniture line and the financial benefit (cost) of dropping it.