Frieda Falcon Fine Furniture produces elegant, high quality,hand-crafted wood furniture. The company is well knownfor its superior craftsmanship. The company had thefollowing results during its most recent fiscal year:
| Coffee Tables | End Tables | Lamps | Totals |
Units | 1,700 | 2,300 | 2,000 | 6,000 |
Sales Revenue | $ 2,125,000 | $ 2,070,000 | $ 280,000 | $ 4,475,000 |
Variable Costs | | | | |
Materials & Labor | 1,360,000 | 1,495,000 | 220,000 | $ 3,075,000 |
Overhead | 255,000 | 184,000 | 50,000 | $ 489,000 |
Contribution Margin | $ 510,000 | $ 391,000 | $ 10,000 | $ 911,000 |
Fixed Costs | | | | |
Allocated GS&A | 103,700 | 140,300 | 122,000 | $ 366,000 |
Marketing & Engineering | 68,000 | 46,000 | 31,000 | $ 145,000 |
Income (Loss) | $ 338,300 | $ 204,700 | $ (143,000) | $ 400,000 |
All variable costs are product specific. AllocatedGS&A costs are corporate costs allocated to individual productsbased on units sold. Marketing and Engineering costs areproduct specific. The company’s management is concernedabout the profitability of lamps. The company isconsidering two options:
Option #1: Eliminate lamp productionand sales. Assume elimination of the lamps will notimpact the sales of other products.
Option #2: Purchase the lamps froman outside supplier. SuperCheap Lamps, Inc. has offeredto sell lamps to the company for $132 per lamp. If lampproduction is outsourced, $6,000 of the Marketing & Engineeringcosts are avoidable (the company will still have $25,000 of lampmarketing costs).
First, consider the two optionsindependently.
Option #1 Part 1: Based on thenumbers, should the company eliminate lamps? Calculatethe differential income. Show your work and highlight youranswers. Work: |
Eliminate Lamps? YES NO | If eliminated income will: Increase Decrease | Dollar amount of Increase/(Decrease) in income ifeliminated: |
Option #1 Part 2a: What qualitativefactors should be considered in the decision of whether toeliminate lamp production? Listyour qualitative factors below. |
Option #1 Part 2b: Will thesequalitative factors change the decision indicated by theelimination calculation above? Why or why not? |
Option #2 Part 1: Based on thenumbers, should the company outsourcelamps? Calculate the differential income.Show your work and highlight your answers. Work: |
Outsource Lamps? YES NO | If outsourced income will: Increase Decrease | Dollar amount of Increase/(Decrease) in income ifoutsourced: |
Option #2 Part 2a: What qualitativefactors should be considered in the decision of whether tooutsource lamp production? Listyour qualitative factors below |
Option #2 Part 2b: Will thesequalitative factors change the decision indicated by theoutsourcing calculation above? Why or why not? |
Finally, consider all options together. Whatshould the company do? (Highlight one)
Nothing. Keep currentstructure. Outsourcelamp production.
Eliminate lampproduction. Other(explain below)
