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 Toddle Town Tours Product Lines Post Pet Store Grocery Office Parade Getaway_PokaTotal $140,000 $135,000 $37,000 $312,000 Salesvenue Variable costs Contribution margin Segment margin Net operating income (loss) 59,000 8,400 7,000 55,000 33,000 147,000 80,000 4,000 $165,000 3,500 20,400 500 $144,600 1,850 15,600 8,500 $ 72,600 71,500 6,750 Less: Direct Fixed costs Less: Common fixed costs 65,600 S64750(1.350) 5129000 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? No 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could be avoided if the POP product line were eliminated Effect on Profit

Explanation / Answer

1 Effect on profit = $500 decrease 2 No, it should not drop POP 3 Effect on profit = $700 increase(1200-500)

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