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	$	75,000		$	70,000		$	24,000			$	169,000
Variable costs		33,000			29,000			19,000				81,000
Contribution margin	$	42,000		$	41,000		$	5,000			$	88,000
Less: Direct Fixed costs		5,800			4,600			4,600				15,000
Segment margin	$	36,200		$	36,400		$	400			$	73,000
Less: Common fixed costs*		7,500			7,000			2,400				16,900
Net operating income (loss)	$	28,700		$	29,400		$	(2,000	)		$	56,100

      
*Allocated based on total sales dollars.

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 $2,000 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

Ans-1- The incremental effect on profit if the POP product is eliminated:

	Pet Store Parade	Grocery Gateway	Total
Sales Revenue	$75,000	$70,000	$145,000
Less: Variable costs	33,000	29,000	62,000
Contribution margin	42,000	41,000	83,000
Less: Direct fixed costs	5,800	4,600	10,400
Segment margin	36,200	36,400	72,600
Less: Common fixed costs			16,900
Net Operating Income/ (Loss)			55,700

Effect on profit= $56,100-$55,700=$400

Profit is decreasing by $400.

Ans-2 No,MSI should not drop POP product since eliminating will further increase the loss.

Ans-3-a-The incremental effect on profit if the POP product is eliminated.Suppose that $2,000 of the common fixed costs could be avoided:

	Pet Store Parade	Grocery Gateway	Total
Sales Revenue	$75,000	$70,000	$145,000
Less: Variable Costs	33,000	29,000	62,000
Contribution Margin	42,000	41,000	83,000
Less: Direct Fixed Costs	5,800	4,600	10,400
Segment Margin	36,200	36,400	72,600
Less: Common Fixed Costs			14,900
Net Operating Income /(Loss)			57,700

Effect On Profit: $57,700-$56,100

$1,600

Profit is increasing by $1,600

Ans-3-b-Yes MSI drop the POP product,since eliminating will increasing the profit.

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