MSI is considering eliminating a product from its Toddle Town Tours collection.
ID: 2555766 • Letter: M
Question
MSI is considering eliminating a product from its Toddle Town 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 Toddle Town Tours Product Lines Pet StoreGrocery Office $110,000 $105,000 $31,000 $246,000 43,000 28,000 118,000 63,000 62,000 S 3,000 $128,000 6,700 2,80016,700 Sales revenue Variable costs Contribution margin Less: Direct Fixed costs 7,200 Segment margin Less: Common fixed costs 5,250 1,550 12,300 s 50,300 50,050 (1,350) S 99,000 Net operating income (loss) 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. Efect on Profit 2. Should MSI drop the POP product? ONo 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,000 of the common fixed costs could be avoided if the POP product line were eliminated. on ProfitExplanation / Answer
1
Incremental effect on profit of the company
Ans
Profit of the company Decrease by $200
Reason: since common fixed cost is more than loss from POP by $200 (1,550-1,350)
2
Should MSI drop POP Product
Ans
No, Since overall profit decrease by $200
3
Effect of profit if $1,000 of common fixed cost can be avoided
Increase In overall profit is $800 ($1,000-$800)
Ans
Increase by $800
1
Incremental effect on profit of the company
Ans
Profit of the company Decrease by $200
Reason: since common fixed cost is more than loss from POP by $200 (1,550-1,350)
2
Should MSI drop POP Product
Ans
No, Since overall profit decrease by $200
3
Effect of profit if $1,000 of common fixed cost can be avoided
Increase In overall profit is $800 ($1,000-$800)
Ans
Increase by $800
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