Problem 8-29 Pharoah Toys\' management is considering eliminating product A, whi

Question

Problem 8-29 Pharoah Toys' management is considering eliminating product A, which has been showing a loss for several years. The company's annual income statement, is as follows Total $2,295,000 $1,408,000 $1,813,500 $5,516,500 601,300 1,099,100 3,308,400 $687,000 $806,700 $714,400 $2,208,100 $611,000 $430,000 $520,000 $1,561,000 47,200 277,000 $718,300 $520,800 $646,100 $1,885,200 $68,300 $322,900 Sales Variable expenses 1,608,000 Contribution margin Advertising expense 10,300 80,500 20,400 105,700 Depreciation expense Corporate expenses Total fixed expenses Operating income 16,500 90,800 $(31,300) $285,900 Advertising expense Specific to each product. Depreciation expense Specific to each product; no other use available, no resale value Corporate expenses - Allocated based on number of employees

Explanation / Answer

1) If product A is dropped, then the total income will be reduced by $59500 (segment income of A) 2) Present segment income of A = $59500 Contribution margin of new product = $10-$5 = $5 Fixed expenses of new product = $611000+$16500 = $627500 The new product is worthwile only if it make atleast segment of Product A (ie. $59500) Number of units to be sold to achive income of $59500 = (Total fixed expenses(traceable)+required profit)/contribution margin per unit =(627500+59500)/$5 = 137400 units

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