Question

Cawley Company makes three models of tasers. Information on the three products is given below.

		Tingler		Shocker		Stunner
Sales		$340,000		$510,000		$250,000
Variable expenses		190,000		210,000		155,000
Contribution margin		150,000		300,000		95,000
Fixed expenses		124,800		225,700		106,000
Net income		$25,200		$74,300		$(11,000)

Fixed expenses consist of $297,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $33,000 (Tingler), $88,000 (Shocker), and $38,500 (Stunner). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a 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 $297,000 common costs to the two remaining product lines based on their relative sales.) (Round intermediate calculations to 4 decimal places, e.g. 15.2575 and final answers to the nearest whole dollar, e.g. 5,275.)

Tingler Net Income $____

Shocker Net Income $____

Total Net Income $____

Answer 1

SEGMENT-WISE INCOME STATEMENT
				TOTAL	Tingler	Shocker	Stunner
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				1,100,000	340,000	510,000	250,000
Less: Variable cost				555,000	190,000	210,000	155,000
Contribution margin				545,000	150,000	300,000	95,000
Less: Fixed expense				159,500	33,000	88,000	38,500
SEGMENT MARGIN				385,500	117,000	212,000	56,500
Less: Common Fixed cost				297,000
Net Operating Income				88,500
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Tingler	Shocker
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue				850,000	340,000	510,000
Less: Variable cost				400,000	190,000	210,000
Contribution margin				450,000	150,000	300,000
Less: Fixed expense				121,000	33,000	88,000
Less: Allocated common fixed cost				297,000	118,800	178,200
Net Income				329,000	117,000	212,000
Tingler Net Income		117000
Shocker Net income		212000
Total Nnet income		329000