E7-16 Cawley Company makes three models of tasers. Information on the three prod
ID: 2585150 • Letter: E
Question
E7-16 Cawley Company makes three models of tasers. Information on the three products is given below. Stunner $200,000 145,000 55,000 95,000 70,000 (40,000) Tingler Shocker Sales Variable expenses Contribution margin Fixed expenses Net income $500,000 200,000 300,000 230,000 $300,000 150,000 150,000 120,000 30,000 Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Tingler), $80,000 (Shocker), and $35,000 (Stunner). The common costs will be incurred regardless of how many mod- els are produced. The other fixed expenses would be eliminated if a model is phased out. James Watt, an executive with the company, feels the Stunner line should be discon- tinued to increase the company's net income. (a) Compute current net income for Cawley Company. (b) Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.) (c) Should Cawley eliminate the Stunner product line? Why or why not?Explanation / Answer
(a). Current net income for cawley company;
Net income for Tingler……………$30000
+ Net income for Shocker…………$70000
- Net loss for Stunner………………$40000
Thus Net Income for cawley company ($30000 + $70000 – $40000) = $60000
(b).
Tingler
Shocker
Total
Sales
300000
500000
800000
Variable expenses
150000
200000
350000
Contribution margin
150000
300000
450000
Common fixed expenses
112500
187500
300000
Additional fixed expenses
30000
80000
110000
Net income
7500
32500
40000
Net income for Tingler……………$7500
Net income for Shocker……...……$32500
Total net income ($7500 + $32500) = $40000
(C).
cawley company should not eliminate stunner product line because in case of eliminating this product line total net income of the company will be $40000 whereas in case of continue with this product line total net income of the company is $60000.
Hence on the basis of total net income it is clear that company should not eliminate stunner product line.
Tingler
Shocker
Total
Sales
300000
500000
800000
Variable expenses
150000
200000
350000
Contribution margin
150000
300000
450000
Common fixed expenses
112500
187500
300000
Additional fixed expenses
30000
80000
110000
Net income
7500
32500
40000
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