Objective

The objective of Problem 5 is to reinforce your understanding of the segmented income statement and how it can be used to determine if a product line should be dropped.

Background - Goodwood Collections Product Lines

Goodwood Collections sells three different product lines in its retail stores:

Office furniture

Home furniture

Kitchen cabinets

Recently a large international home improvement chain has opened a store in town. One of the products the chain store sells is kitchen cabinets. These cabinets compete directly with Goodwood Collections kitchen cabinet product line. Pat is feeling this competitive pressure and has been forced to lower prices on all kitchen cabinets sold in Goodwood Collections retail store. In addition, because the kitchen cabinet product line requires some custom design, fitting, and parts for installation, it has higher costs than the office furniture and home furniture product lines. So, Pat believes that Goodwood Collections is losing money on the kitchen cabinet product line.

Sales and Cost Analysis

You help Pat analyze and assemble the following annual sales and cost information for each of the three product lines:

Sales by product line:

Office furniture sales dollars $360,000

Home furniture sales dollars $720,000

Kitchen cabinet sales dollars $120,000

Office Furniture variable expenses - Percentage of sales dollars:

Cost of goods sold 54%

Commissions 2%

Freight out 1%

Supplies 1.5%

Home Furniture variable expenses - Percentage of sales dollars:

Cost of goods sold 55%

Commissions 2%

Freight out 1%

Supplies 1.5%

Kitchen Cabinets variable expenses - Percentage of sales dollars:

Cost of goods sold 69%

Commissions 4%

Freight out 2%

Supplies 3%

Fixed advertising expenses directly traceable to each product line:

Office furniture $3,200

Home furniture $8,000

Kitchen cabinet $20,800

Fixed depreciation expenses directly traceable to each product line:

Office furniture $8,400

Home furniture $12,600

Kitchen cabinet $21,000

Common fixed expenses not traceable to product lines:

Advertising $24,000

Depreciation $6,000

Insurance & legal services $27,750

Rent & utilities $36,400

Salaries $145,800

Prepare your answers to the following requirements:

1. Prepare a segmented income statement including all three product lines in the template provided. Round all amounts to the nearest dollar. Check figure: Total product line segment margin = $393,400.

2. Pat is seriously considering dropping the kitchen cabinet product line. If that happens, Pat believes that the space made available in the store can be used to expand the display area for new pieces of office furniture. This space made available in the store can be used to expand the display area for new pieces of office furniture. This would increase sales of the office furniture product line by 10%. However, since customers who come in to the store to purchase kitchen cabinets sometimes also purchase home furniture, dropping the kitchen cabinet product line will reduce sales of home furniture by 5%. All other costs and cost relationships will be unchanged.

Assuming the kitchen cabinet product line is dropped, prepare a revised segmented income statement including only the office furniture and home furniture product lines in the template provided. Round all amounts to the nearest dollar. Check figure: Total product line margin = $409,160.

3. What will be the change in overall net operating income if Pat drops the kitchen cabinet product line? Should Pat drop the kitchen cabinet product line based upon the financial analysis?

Templates

		Goodwood Collections
		Segmented Income Statment
		Three Product Lines	Product Outlines
	Total Company	Office Furniture	Home Furniture	Kitchen Cabinets
...	...	...	...	...

	Goodwood Collections
	Segmented Income Statement
	Two Product Lines
		Product Lines
	Total Company	Office Furniture	Home Furniture