a. Sandford Electronics sells desktops and notebook computers. Currently, the desktop product line takes up approximately 50 percent of the company's retail floor space. The president of the company is trying to decide whether the company should continue offering desktops or just concentrate on notebooks. If the desktop product line is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of notebooks will increase by 10 percent. Allocated fixed costs are assigned based on labor hours.
Notebooks: $1,200,000
Desktops: $700,000
Total: $1,900,000
Sales: $800,000
Less cost of goods sold: $2,000,000
Contribution margin: $1,200,000
Less direct fixed costs:
Salaries: $500,000
Other: $300,000
Less allocated fixed costs:
$175,000
$175,000
$350,000
Rent: $60,000
Insurance: $60,000
Cleaning: $120,000
President's salary: $14,118
Other: $3,529
Total costs: $340,292
Net income: $159,708
$9,882
$24,000
$2,471
$2,883
$6,000
$7,000
$53,530
$130,000
$4,942
$12,000
$649,000
$308,708
($8,708)
$151,000
Prepare an incremental analysis in good form to determine the incremental effect on net income of discontinuing the desktop computer line.
b. Sausalita's Cantina has been approached by Luck & Dewey that wants to hold an employee recognition dinner next month. The restaurant manager agreed to a charge of $50 per person for food, wine, and dessert for 90 people. The manager estimates that the cost of the food will be $17 per person and beverages will be $15 per person.
To be able to accommodate the group, the restaurant must be closed for dinner that night. Typically, 100 people with an average bill of $44 per person would be served each evening, with the cost of food estimated at $14 per person and beverages at $11 per person. No additional staff will need to be hired to accommodate the group from Luck & Dewey.
1. In good form, prepare an incremental analysis to determine the effect on net income associated with accepting the Luck & Dewey group.
2. What is the opportunity cost of accepting the Luck & Dewey group?
