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Computer Village sells computer equipment and home office furniture. Currently the furniture...

Question:

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 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 13.00 percent without affecting direct fixed costs. Allocated fixed costs are assigned based on relative sales. Determine whether Computer Village should discontinue the furniture line and the financial benefit (cost) of dropping it.

Computer Equipment Home Office Furniture Total
Sales $1,450,000$1,116,500$2,566,500
Less cost of goods sold 942,500 812,0001,754,500
Less direct Fixed costs:
Salaries 177,625 177,625 355,250
Other: 60,90060,900121,800
Less allocated fixed costs:
Rent13,31010,62023,930
Insurance3,3202,5605,880
Cleaning3,8703,1307,000
President's salary65,5805,34070,920
Net Income/Loss $109,515$(12,865) $96,650

Incremental Analysis:

An incremental analysis is a decision-making tool used by management in order to determine the financial effects of a decision. This analysis demonstrates the economic effect of the various alternatives and, as a result, compares the net income of each alternative. The alternative offering the highest net income typically should be chosen.

Answer and Explanation: 1

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First, we'll evaluate and foot the Computer Village data provided to us.

Computer Equipment Home Office Furniture Total
Sales $1,450,000$1,116,500...

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Incremental Analysis: Definition & Examples

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Chapter 9 / Lesson 7
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Learn about incremental analysis. Understand what incremental analysis is, learn the applications of incremental analysis, and see examples of incremental analysis.


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