Gabriela & Co. supplies specialized furniture to two local retailers Stevens and Cohen. Fixed costs are allocated on the basis of revenues.

Total Stevens Cohen

Revenue $300,000 $200,000 $100,000

Variable cost 130,000 70,000 60,000

Contribution margin $170,000 $130,000 $ 40,000

Fixed cost 150,000 100,000 50,000

Net Operating Income $ 20,000 $ 30,000 ($ 10,000)

1. Should Gabriela & Co. drop the Cohen business, assuming that dropping Cohen would decrease total fixed cost by 10%? (Worth 2 pts.)

2. What effect would dropping Cohen have on Gabriela & Co. total operating income? What would be Gabriela & Co. total net operating income if Cohen is dropped? (Worth 2.5 pts.)

3. Assume that if Gabriela & Co. drops Cohens business it can lease the excess capacity to the Perez Corp. for $50,000. Fixed costs would not decrease by the 10% though. Should Gabriela & Co. lease to Perez? (Worth 3 pts.)