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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
Contribution margin
$300,000
Less direct fixed costs
Salaries
$175,000
$350,000
Other
$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
$7,058
$4,942
$12,000
Total costs
$340,292
$308,528
$649,000
Net Income
$159,708
($8,528)
$151,180
Before year end adjusting entries, Bass Company's account balances at December 31, 2007, for accounts receivable and the related allowance for uncollectible accounts were $600,000 and $45,000, respectively.
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