2. Differential analysis: Discontinuing a product Danbury Furniture sells home f

Question

2. Differential analysis: Discontinuing a product

Danbury Furniture sells home furnishing, such as furniture, lamps and lighting fixtures, and wall arts. The company is considering whether to discontiure selling wall art because of slowing sales.Wall art accounted for total sales of $2,300,000 during the most recent year. Cost of goods old related to wall art included variable cost of $2,135,000 and fixed cost of $51,500. Operating expenses related to wall art included variable expenses of $280,000 and fixed expenses of $46,200. None of the fixed cost or fixed expenses will be eliminated if wall art is discontinued.

If the company's curret total income from operations is $270,000, what will the company's total income from operations be if wall art is discontinued?

Should the company discontinuw wall art?

Explanation / Answer

Wall art's contribution margin = Total sales - Variable cost of goods sold - variable operating expenses

= $2,300,000 - $2,135,000 - $280,000

= -$115,000

Wall art's contribution margin is negative, this means, wall art is eating up the contribution povided by other products. Thus,  if wall art is discontinued, the company's total contribution margin will increase by $115,000 and consequently the company's total income from operations will also increase by the same amount.

Therefore, if wall art is discontinued, the company's total income will be $385,000 ($270,000 + $115,000).

Yes, the company should discontinue wall art because this product is not even able to recover the variable costs associated with it. The contribution margin of this product is negative.  

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