Exercise 21-16 Exercise 21-16 Cawley Company makes three models of tasers. Infor

Question

Exercise 21-16

Exercise 21-16

Cawley Company makes three models of tasers. Information on the three products is given below.
Tingler Shocker Stunner Sales $300,000 $500,000 $200,000 Variable expenses 155,000 190,000 135,000 Contribution margin 145,000 310,000 65,000 Fixed expenses 127,000 215,000 93,000 Net income $18,000 $95,000 $(28,000)
Fixed expenses consist of $290,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $40,000 (Tingler), $70,000 (Shocker), and $35,000 (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 $290,000 common costs to the two remaining product lines based on their relative sales.) (Round intermediate calculations to 4 decimal places, e.g. 15.2500 and final answers to the nearest whole dollar, e.g. 5,275.)
Tingler Net Income $ Shocker Net Income $ Total Net Income $

Explanation / Answer

Solution:

a. Current net income for Cawley Company = $18,000 + $95,000 - $28,000 = $85,000

b. If company discontinues Stunner line:

Total Net income = $64,250 + $103750 = $168,000

Tingler Shocker Sales $300,000 $500,000 Variable expnses $108,750 $181,250 Contribution MArgin 191,250 318,750 Fixed expnses 127,000 215,000 Net income 64,250 103750

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