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	$	125,000		$	120,000		$	34,000			$	279,000
Variable costs		53,000			49,000			30,000				132,000
Contribution margin	$	72,000		$	71,000		$	4,000			$	147,000
Less: Direct Fixed costs		7,800			7,600			3,200				18,600
Segment margin	$	64,200		$	63,400		$	800			$	128,400
Less: Common fixed costs*		6,250			6,000			1,700				13,950
Net operating income (loss)	$	57,950		$	57,400		$	(900	)		$	114,450

      
*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 $1,200 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

	Incremental Analysis
	ToddleTown Tours Product Lines
		With POP	Without POP	Incremental Revenue/(loss)
	Sales revenue	279,000	245,000	-34,000
	Variable costs	132,000	102,000	30,000
	Contribution margin	147,000	143,000	-4,000
	Less: Direct Fixed costs	18,600	15400	3,200
	Segment margin	128,400	127,600	-800
	Less: Common fixed costs*	13,950	13950	0
	Net operating income (loss)	114,450	113,650	-800
1	Profit will decrease by $800 if POP is eliminated.
2	No, MSI should not drop POP Product.
	Incremental Analysis
	ToddleTown Tours Product Lines
		With POP	Without POP	Incremental Revenue/(loss)
	Sales revenue	279,000	245,000	-34,000
	Variable costs	132,000	102,000	30,000
	Contribution margin	147,000	143,000	-4,000
	Less: Direct Fixed costs	18,600	15400	3,200
	Segment margin	128,400	127,600	-800
	Less: Common fixed costs*	13,950	12,750	1,200
	Net operating income (loss)	114,450	114,850	400
3a	Profit will Increase by $400 if POP is eliminated.
3-b	Yes, MSI should drop the POP product.