Question

In: Accounting

MSI is considering eliminating a product from its ToddleTown Tours collection. This collection is aimed at...

MSI is considering eliminating a product from its ToddleTown Tours collection. This collection is aimed at children one to three years of age and includes “tours” of a hypothetical town. Two products, The Pet Store Parade and The Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, The Post Office Polka, have lagged the others. Several other CDs are planned for this collection, but none is ready for production.  

MSI’s information related to the ToddleTown Tours collection follows:  

Segmented Income Statement for MSI’s
ToddleTown Tours Product Lines
Pet Store Parade Grocery Getaway Post Office Polka Total
Sales revenue $ 50,000 $ 45,000 $ 15,000 $ 110,000
Variable costs 23,000 19,000 10,000 52,000
Contribution margin $ 27,000 $ 26,000 $ 5,000 $ 58,000
Less: Direct Fixed costs 4,800 3,100 3,500 11,400
Segment margin $ 22,200 $ 22,900 $ 1,500 $ 46,600
Less: Common fixed costs* 14,400 12,960 4,320 31,680
Net operating income (loss) $ 7,800 $ 9,940 $ (2,820 ) $ 14,920

*Allocated based on total sales revenue.      

MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products.  

Required:
1. Calculate the incremental effect on profit if the POP product is eliminated.

   

2. Should MSI drop the POP product?

Yes
No

   

3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $3,700 of the common fixed costs could be avoided if the POP product line were eliminated.

   

3-b. Should MSI drop the POP product?

Yes
No

Solutions

Expert Solution

Answer:

1. Calculate the incremental effect on profit if the POP product is eliminated.
Effect on profit

Contribution lost on POP program

-5000

Add:

Savings in direct fixed cost

3500

net loss

-1500


   

2. Should MSI drop the POP product?

No

   
Explanation:

If POP product is eliminated there will be net loss by $1,500

________________________________________________________________________
3-a.

Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $3,700 of the common fixed costs could be avoided if the POP product line were eliminated.


   

Contribution lost on POP program

-5000

Add:

Savings in direct fixed cost

3500

Savings in common fixed costs

3700

increase in net profit

2200



3-b. Should MSI drop the POP product?

Yes

Explanation:

If POP product is eliminated there will be increase in profit by $2,200


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