MSI is considering eliminating a product from its ToddleTown Tours collection. T

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 Toddle Town Tours collection follows Segmented Income Statement for MSI's ToddleTown Tours Product Lines Pet Store Parade Grocery Post Office Getawa Polka Total Sales revenue Variable costs $ 60,000 55,000 21,000 $136,000 27,000 5.200 12,000 23,000 3,700 11,000 15,000 65.000 $ 33,000 32,000 6,000 S 71,000 Contribution margin Segment margin Net operating income (loss) 4,100 13.000 $ 27,800 28,300 1,900 S 58,000 4,200 27 200 Less: Direct Fixed costs Less: Common fixed costs 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 Effect on Profit 2. Should MSI drop the POP product? O Yes 0 3-a. Calculate the Incremental effect on profit if the POP product is eliminated. Suppose that $2,500 of the common fixed costs could be avolded if the POP product line were eliminated Effect on Profit 3-b. Should MSI drop the POP product? O Yes O No

Explanation / Answer

1 Profit decreases by $1900 2 No 3 Effect on profit=-1900+2500 = $600 Profit increases by $600 3b Yes

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