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	$	55,000		$	50,000		$	20,000			$	125,000
Variable costs		25,000			21,000			15,000				61,000
Contribution margin	$	30,000		$	29,000		$	5,000			$	64,000
Less: Direct Fixed costs		5,000			3,400			4,000				12,400
Segment margin	$	25,000		$	25,600		$	1,000			$	51,600
Less: Common fixed costs*		14,080			12,800			5,120				32,000
Net operating income (loss)	$	10,920		$	12,800		$	(4,120	)		$	19,600

      
*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 $4,000 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

Requirement 1

Segmented Income Statement for MSI’s
ToddleTown Tours Product Lines
	Pet store Parade	Grocery Gateaway	Post office Polka	Total
Sales revenue	$ 55,000.00	$ 50,000.00		$    1,05,000.00
Variable costs	$ 25,000.00	$ 21,000.00		$       46,000.00
Contribution margin	$ 30,000.00	$ 29,000.00	$                 -	$       59,000.00
Less: Direct Fixed costs	$    5,000.00	$    3,400.00		$          8,400.00
Segment margin	$ 25,000.00	$ 25,600.00	$                 -	$       50,600.00
Less: Common fixed costs*	$ 14,080.00	$ 12,800.00	$    5,120.00	$       32,000.00
Net operating income (loss)	$ 10,920.00	$ 12,800.00	$ (5,120.00)	$       18,600.00

Incremental effect on profit= (19600-18600) loss of $1000

Requirement 2

Should MSI drop the POP product?-------No

The dropping of POP would decrease net income so its better to continue.

Requirement 3-a

Segmented Income Statement for MSI’s
ToddleTown Tours Product Lines
	Pet store Parade	Grocery Gateaway	Post office Polka	Total
Sales revenue	$ 55,000.00	$ 50,000.00		$    1,05,000.00
Variable costs	$ 25,000.00	$ 21,000.00		$       46,000.00
Contribution margin	$ 30,000.00	$ 29,000.00	$                 -	$       59,000.00
Less: Direct Fixed costs	$    5,000.00	$    3,400.00		$          8,400.00
Segment margin	$ 25,000.00	$ 25,600.00	$                 -	$       50,600.00
Less: Common fixed costs*	$ 14,080.00	$ 12,800.00	$    1,120.00	$       28,000.00
Net operating income (loss)	$ 10,920.00	$ 12,800.00	$ (1,120.00)	$       22,600.00

Incremental effect will be Increase in income by $3000

.

Requirement 3-b

Should MSI drop the POP product?---------Yes

Dropping POP would increase net profit so it should be dropped.