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 ToddleTown Tours collection follows: Segmented Income Statement for MSI’s ToddleTown Tours Product Lines Pet Store Parade Grocery Getaway Post Office Polka Total Sales revenue $ 90,000 $ 85,000 $ 27,000 $ 202,000 Variable costs 39,000 35,000 22,000 96,000 Contribution margin $ 51,000 $ 50,000 $ 5,000 $ 106,000 Less: Direct Fixed costs 6,400 5,500 4,500 16,400 Segment margin $ 44,600 $ 44,500 $ 500 $ 89,600 Less: Common fixed costs* 9,000 8,500 2,700 20,200 Net operating income (loss) $ 35,600 $ 36,000 $ (2,200 ) $ 69,400 *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. 2. Should MSI drop the POP product? Yes No 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $2,000 of the common fixed costs could be avoided if the POP product line were eliminated. 3-b. Should MSI drop the POP product? Yes No

Explanation / Answer

Pet Storeparade Grocery Getaways Total Sales revenue 90000 85000 175000 Less: Variable cost 39000 35000 74000 Contribution 51000 50000 101000 Less: Direct fixed cost 6400 5500 11900 Less: Common Fixed cost(20,200 in sales i.e. 90:85) 10389 9811 20200 Net operating income 34211 34689 68900 No, MSI should not drop Post office polka, as it would lead to drop in profist by $ 500 Pet Storeparade Grocery Getaways Total Sales revenue 90000 85000 175000 Less: Variable cost 39000 35000 74000 Contribution 51000 50000 101000 Less: Direct fixed cost 6400 5500 11900 Less: Common Fixed cost(20,200Less: Savings $2000 ) 9360 8840 18200 Net operating income 35240 35660 70900 Now, Post office Polka should drop, as it will lead to overall increase in profits by $ 1,500

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