Reference no: EM13173260

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.