MSI is considering eliminating a product from its Toddle Town Tours collection.

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 ToddleTown Tours collection follows Segmented Income Statement for MSI's Pet Store Grocery Office Parade Getaway Polka Total Sales revenue Variable costs $36.000 $35.000 8,000 $ 79,000 5,400 4,000 4,200 13,600 Contibution margin Segment margin Net operating income (loss) Less: Direct Fixed costs Less: Common fixed costs 4.400 29.40 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 O No 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $4,000 of the common fixed costs could be avoided if the POP product line were eliminated. Effect on Profit

Explanation / Answer

Answer:

1

Effect on profit = Decrese in profit/ Net loss =(3800)

Working notes for the answer:

Effect on profit

Contribution lost on POP program

-8000

Savings in direct fixed cost

4200

net loss

-3800

____________________________________________________________

2

No

MSI should not drop POP line

________________________________________________

3

Effect on profit = Increase in profit by =$200

Effect on profit

Contribution lost on POP program

-8000

Savings in direct fixed cost

4200

Savings in Common fixed cost fixed cost

4000

net loss

200

here MSI should drop POP line

Effect on profit

Contribution lost on POP program

-8000

Savings in direct fixed cost

4200

net loss

-3800

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