Danbury Furniture sells home furnishings, such as furniture, lamps and lighting

Question

Danbury Furniture sells home furnishings, such as furniture, lamps and lighting fixtures, and wall art. The company is considering whether to discontinue selling wall art because of slowing sales. Wall art accounted for total sales of $8,700,00 during the most recent year. Cost of goods sold related to wall art included variable costs of $8,115,000 and fixed costs of $59,500. Operating expenses related to wall art included variable expenses of $440,000 and fixed expenses of $52,600. None of the fixed costs or fixed expenses will be eliminated if wall art is discontinued. If the company's current total income from operations is $430,000, what will the company's total income from operations be if wall art is discontinued? Should the company discontinue wall art?

Explanation / Answer

Income from Wall art division

Wall art division should not be discountinued as contribution from the division is positive at $ 145000 (Selling Price - Variable Cost) and the fixed cost of the division is unavoidable i.e. will be incurred even if the division is closed down resulting in decrease in total income from operations

Sales 8700000 Less Cost of Goods Sold Variable Cost 8115000 Fixed Cost 59500 8174500 525500 Less Other Operating Expense Variable Cost 440000 Fixed Cost 52600 492600 Income from wall art division 32900

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