Question

1-

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	$	145,000		$	140,000		$	38,000			$	323,000
Variable costs		61,000			57,000			34,000				152,000
Contribution margin	$	84,000		$	83,000		$	4,000			$	171,000
Less: Direct Fixed costs		8,600			8,800			3,600				21,000
Segment margin	$	75,400		$	74,200		$	400			$	150,000
Less: Common fixed costs*		7,250			7,000			1,900				16,150
Net operating income (loss)	$	68,150		$	67,200		$	(1,500	)		$	133,850

      
*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.


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

	Effect on Profit

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 $1,200 of the common fixed costs could be avoided if the POP product line were eliminated.

	Effect on Profit

3-b. Should MSI drop the POP product?

	Yes
	No

2-

MSI’s educational products are currently sold without any supplemental materials. The company is considering the inclusion of instructional materials such as an overhead slide presentation, potential test questions, and classroom bulletin board materials for teachers. A summary of the expected costs and revenues for MSI’s two options follows:

	CD Only				CD with Instructional Materials
Estimated demand			34,000	units			34,000	units
Estimated sales price		$	26.00			$	45.00
Estimated cost per unit
Direct materials		$	4.25			$	6.75
Direct labor			6.50				10.50
Variable manufacturing overhead			6.50				9.75
Fixed manufacturing overhead			7.00				7.00
Unit manufacturing cost		$	24.25			$	34.00
Additional development cost						$	105,000

  

1. Based on the given data, Compute the increase or decrease in profit that would result if instructional materials were added to the CDs.

	CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

2. Should MSI add the instructional materials or sell the CDs without them?

	- Sell the CDs without Instructional Materials
	- Add the Instructional Materials

  
3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 21,000 units. Complete the table given below based on Requirement 1 and 2 data.

  

	CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss)

3-b. Should MSI add the instructional materials or sell the CDs without them?

-	Add the Instructional Materials
-	Sell the CDs without Instructional Materials

Answer 1