Ashton Home Furnishings manufactures hutches, tables, and beds in a modern plant located in beautiful, historic Ashton. The following sales and cost information is available relating to the profitability of these three product lines:

					Hutches	Tables	Beds
Sales					$ 750,000	$ 500,000	$ 1,000,000
Costs:
Direct materials					300,000	220,000	400,000
Direct labour					75,000	60,000	80,000
Material handling					45,000	40,000	60,000
Amortization					50,000	48,000	72,000
Selling & marketing					75,000	60,000	120,000
General administration					150,000	100,000	200,000
Total costs					695,000	528,000	932,000
Operating income					55,000	(28,000)	68,000

The following additional information has been made available to you:

1. Direct materials and direct labour vary directly with the number of units produced.
2. Material handling costs vary directly with the number of units produced.
3. Amortization is calculated using the straight-line method.
4. 50% of the selling and marketing costs consist of corporate marketing costs and are allocated to the product lines based on relative product line sales. The balance of the selling and marketing costs is comprised of variable sales commissions.
5. General administration costs include product line manager salaries which are $60,000 for hutches’ line, $50,000 for the tables’ line and $65,000 for the beds’ line. The balance is made up of costs that are allocated from head office and are not directly related to the product lines.
6. If the tables’ product line is dropped, then its manager would be transferred to head office where she would replace a $40,000 per year accounting clerk.

Required:

1. Assuming that the plant space taken up by the tables’ product line would remain idle, should the product line be dropped? Your answer should only consider quantitative factors and you must show all your calculations.
2. Assuming that the plant space taken up by the tables’ product line could be rented out for $50,000 per year, would your answer that you provided in part 1 change? Show calculations.
3. Ignore your answer in part 2. Assuming that the idle space could be used by the beds’ product line and that its sales would increase by $300,000, should the company discontinue the tables’ product line? Show calculations.
4. Ignoring the additional information provided in parts 2 and 3, identify two qualitative factors that the company should consider before deciding to discontinue the tables’ product line.

Answer rating: 100% (QA)

Lets break down each part of the question step by step and perform the necessary calculations Part 1 Should the product line be dropped Without consid... View the full answer