Question

Cawley Company makes three models of tasers. Information on the three products is given below. Tingler Shocker Stunner Sales $300,000 $500,000 $200,000 Variable expenses 151,100 195,300 138,700 Contribution margin 148,900 304,700 61,300 Fixed expenses 120,000 229,600 94,100 Net income $28,900 $75,100 $(32,800) Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $30,000 (Tingler), $79,600 (Shocker), and $34,100 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company’s net income. (a) Compute current net income for Cawley Company. Net income $ (b) Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.) Tingler Net Income $ Shocker Net Income $ Total Net Income $ (c) Should Cawley eliminate the Stunner product line? Why or why not? Net income would from $ to $ .

Answer 1

Current Net Income for Crawley Company = 28900+75100-32800 = $71,200

	Tingler	Shocker	Total
Sales	300,000	500,000	800,000
Variable expenses	151,100	195,300	346,400
Contribution Margin	148,900	304,700	453,600
Fixed costs	142,500	267,100	409,600
Net Income	6,400	37,600	44,000

Should not eliminate as Net Income Would DECREASE from $71,200 to $44,000