Computer Boutique

(TCO 7) 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
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 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

Other
7,058
4,942
12,000

Total costs
340,292
380,708
649,000

Net Income
$159,708
($ 8,708)
$151,000

Prepare an incremental analysis to determine the incremental effect on profit of discontinuing the furniture line. (Points: 25)

3. (TCO 4) The following monthly data are available for RedEx, which produces only one product that it sells for $84 each. Its unit variable costs are $28 and its total fixed expenses are $64,960. Sales during April totaled 1,600 units.

(a) How much is the breakeven point in sales dollars for RedEx?
(b) How many units must RedEx sell in order to earn a profit of $24,640?
(c) A new employee suggests that RedEx sponsor a company softball team as a form of advertising. The cost to sponsor the team is $1,792. How many more units must be sold to cover this cost? (Points: 25)