Discontinuing a product line, selling more product, activity-based costing. Home Furnishings makes bookshelves, tables, and beds. The following sales and cost information is available about the profitability of each ofthese lines:

Bookshelves Tables Beds Total Revenues $825,000 $550,000 $1,100,000 $2,475,000 Direct materials 330,000 242,000 440,000 1,012,000 Direct manufacturing labour 82,500 66,000 88,000 236,500 Setups and materials-handling 49,500 44,000 66,000 159,500 Amortization on tools and fixtures 55,000 52,800 79,200 187,000 Marketing and distribution 82,500 66,000 132,000 280,500 General administration and facilities 165,000 110,000 220,000 495,000 Total costs 764,500 580,800 1,025,200 2,370,500 Operating income (loss) $ 60,500 $ (30,800) $ 74,800 $ 104,500 Home Furnishings uses an activity-based cost system to assign costs to products. The follow¬

ing additional information is available:

a. Direct materials and direct manufacturing labour costs vary with the number of units of products manufactured.

b. fietups and materials-handling costs vary with the number of batches made.

c. Tools and fixtures have one-year lives and zero disposal prices.

d. Ofthe total marketing and distribution costs, $123,750 are fixed costs allocated to product lines based on sales revenue. Fixed marketing and distribution costs allocated to a product line can be avoided if the line is discontinued. The remaining marketing costs vary with the number ofshipments made.

e. General administration and facilities costs are fixed costs that will not change if sales of individual product lines are increased or decreased or if product lines are added or dropped. These costs are allocated to product lines based on sales revenues.

Required In answering the following requirements, assume that prices of the various products do not change.

1. Should Home Furnishings discontinue the tables product line assuming the released facilities remain idle? Assume Home Furnishings has already acquired the tools and fixtures it needs to manufacture tables.

2. Suppose thatifHome Furnishings discontinues the tables product line, the released facilities could be used to sell beds worth an additional $275,000. This would require Home Furnishings to purchase tools and fixtures for $4,400. Assume that there will be no change in either the number of batches in which beds are made or the number ofshipments.

a. Based on your calculations, should Home Furnishings discontinue the tables product line?

b. What is the opportunity cost of continuing the tables product line?

460 I CHAPTER 11 C. What other factors should Home Furnishings consider before making a decision?

3. What would be the effect on operating income if Home Furnishings could double its sales of tables? Assume that, at the higher sales, both the number of batches and the number of shipments would be three times and purchases of tools and fixtures would be twice the current levels.