Problem 2

Blues Company produces and sells 3 styles of office chairs Standard, Deluxe and Premium. Below is an analysis of the Operating Profit report, which is prepared in a Contribution Margin format.

	Product Lines
	Standard	Deluxe	Premium	Total
Selling price per unit	$134.40	$187.50	$295.38	$171.65
Sales	$336,000	$150,000	$192,000	$678,000
Less: variable costs	72,000	80,000	88,000	240,000
Contribution margin	$264,000	$70,000	$104,000	$438,000
Less: fixed expenses	147,848	47,311	38,441	233,600
Net operating income	$116,152	$22,689	$65,559	$204,400

In examining the report, company management contemplates eliminating Deluxe and increasing investment in one of the other product lines either Standard or Premium. You have been asked to advise management concerning this decision.

Required

Assuming fixed costs are allocated to each Product line based on unit sales:

Compute the Break-even in product sales for each product line

As currently presented

For Standard and Premium, assuming they eliminate the Deluxe product line.

Compute Operating Leverage for Standard and Premium

As currently presented

Assuming they eliminate the Deluxe product line.

Using your analysis from parts 1 & 2, can you suggest several reasons for keeping the Deluxe product line? Please explain.

If the company eliminates Deluxe, which product line should they increase their investment in, Standard or Premium? Please explain your answer.