Question

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

Answer 1

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