Reference no: EM132620367
Golden Valley 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 Golden Valley is trying to decide 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 12 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales.
Computer Equipment Home Office Furniture Total
Sales $1,430,000 $1,101,100 $2,531,100
Less cost of goods sold 929,500 800,800 1,730,300
Contribution margin 500,500 300,300 800,800
Less direct fixed costs:
Salaries 180,180 180,180 360,360
Other 60,060 60,060 120,120
Less allocated fixed costs:
Rent 14,190 11,603 25,793
Insurance 3,220 2,816 6,036
Cleaning 3,590 2,965 6,555
President's salary 71,120 58,418 129,538
Other 6,300 4,961 11,261
Net income / (loss) $161,840 ($20,703) $141,137
Question 1: Determine whether Golden Valley should discontinue the furniture line and the financial benefit (cost) of dropping it.