Home Trends sells kitchenware, wooden flooring and cane furniture at a single store location in trendy Kinvara, Co. Galway, mainly to customers living in apartments, townhouses and holiday homes. With regard to cane furniture, rapidly changing consumer taste in furniture has seen a decline in sales and rising inward transportation costs from the Far East, causing larger order quantities to be purchased with ensuing problems in finding space for slow-moving inventories, which has depressed margins. Recent figures for the last quarter were:

Management is evaluating whether to drop cane furniture because of changing consumer trends and accompanying losses and replace it with a selection of artisan products, made by the local community. If the cane line is dropped, the following changes are expected to occur:
(a) The vacated space will be remodelled at a cost of €2,500 and some of this space will be devoted to artisan gift products, made by the local community. These products are expected to generate extra revenues of €25,000 and an incremental contribution (before remodelling cost) of €15,000 per annum.
(b) The remaining vacated space will be given to some new product ranges in wooden flooring and more space for customers to walk around the display stands. These changes are expected to increase revenue of wooden flooring by €35,000, and the line's overall average contribution to sales ratio will rise by 5% on all sales.
(c) Home Trends will save 70% of the separable fixed costs of cane furniture (not counting the remodelling cost), having been replaced with new artisan products which are small, require less floor space, cheaper display and junior sales staff. The separable fixed costs of kitchenware and wooden flooring will continue to be incurred at the same level.
(d) The firm will increase advertising expenditures by €2,500 to promote the artisan products.

Required

1. Draft a report to the commercial director of Home Trends giving your calculations and recommendations for the following questions:
(a) Should Home Trends close its cane furniture department? Show your relevant costing calculations and state your advice.
(b) Compute the weighted average break-even point, for the existing three product lines. Compute the new weighted average break-even point with the new total revenues of €350,000, the substitution of
€25,000 revenue of artisan products and an extra €35,000 of revenue from new wooden floor lines.
Interpret this information for the commercial director.
(c) Irrespective of whether the cane furniture department is closed or not, management is considering providing a 'mornings only' interior design consultant. A new studio would be set up in the foyer of the store, a van with a logo would be hired for home visits and some new display fixtures would be installed. The total cost of running the interior design consultancy would be a mixed cost. The consultation fee is projected at €75 per hour per customer (per service unit) for the next month. The sales and associated total costs of the service projected for the next month are as follows:

2. Use the high–low method to estimate the cost equation for the interior design service. Compute the
projected break-even point for the interior design service and the total profit from 50 consultations (most
likely level) for the next month. Advise the management on this proposed development.

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Revenue Variable costs Separable fixed costs (staffing, display units and inventory- holding costs, excluding central costs) Total costs Departmental profits Advertising Part-time accounts Total operating profit/(loss) Kitchenware department € 120,000 (72,000) (30,000) (102,000) 18,000 Wooden flooring department € 170,000 (109,000) (40,000) (149,000) 21,000 Cane furniture department € 150,000 (90,000) (95,000) (185,000) (35,000) Total € 440,000 (271,000) (165,000) (436,000) 4,000 (2,000) (15,000) (13,000)