Shatner Company makes three models of phasers. Information on the three products

Question

Shatner Company makes three models of phasers. Information on the three products is given below.
Stunner Double-Set Mega-Power
Sales $300,000 $500,000 $200,000
Variable expenses 150,000 200,000 140,000
Contribution margin 150,000 300,000 60,000
Fixed expenses 120,000 225,000 90,000
Net income $30,000 $75,000 $(30,000)



Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,000 (Double-Set), and $30,000 (Mega-Power). 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.
Jim Kirk, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.

Instructions

Compute current net income for Shatner Company.

$

Compute net income by product line and in total for Shatner Company if the company discontinues the Mega-Power product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)

Stunner net income

$

Double-set net income

$

Total net income

$

Should Shatner eliminate the Mega-Power product line?

Explanation / Answer

Compute current net income for Shatner Company.
    $30,000 + $75,000 - $30,000
    $75,000

Compute net income by product line and in total for Shatner Company if the company discontinues the Mega-Power product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)

                             Stunner     Double-Set     Total
Sales                   $300,000     $500,000      $800,000
Variable exp.       $150,000     $200,000      $350,000
Contr. Margin   $150,000     $300,000       $450,000

Fixed expenses
Product related    $30,000      $75,000        $105,000
Common costs $112,500     $187,500        $300,000
Total Fixed exp. $142,500    $262,500        $405,000
Net Income          $7,500       $37,500          $45,000

Stunner net income
$7,500

Double-set net income
$37,500

Total net income
$45,000

Should Shatner eliminate the Mega-Power product line? No, Shatner should not eliminate Mega-power since elimination would reduce Net Income by $30,000 ($75,000 - $45,00).

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