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

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 $3,000 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

Please explain how you got those numbers.

Segmented Income Statement from MSI's ToddleTown Tours Product Lines Pet Store Parade Grocery Getaway Post Office Polka Total Sales Revenue $80,000 $75,000 $25,000 $180,000 Variable Costs $35,000 $31,000 $20,000 $86,000 Contribution Margin $45,000 $44,000 $5,000 $94,000 Less; Direct Fixed Costs $6,000 $4,900 $4,700 $15,6000 Segment Margin $39,000 $39,100 300 $78,400 Less: Common Fixed Costs* $12,000 $11,250 $3,750 $27,000 Net Operating Fixed Income (Loss) $27,000 $27,850 ($3,450) $51,400

Explanation / Answer

1. Income statement

Hence, if POP is eliminated, total profits of MSI will drop from $51,400 to $46,400.

2.

Since by dropping the POP product, total profits of MSI will fall from $51,400 to $46,400, hence POP product should not be eliminated.

3a

Income statement

Hence, if POP is eliminated, total profits of MSI will drop from $51,400 to $49,400.

3b.

Since by dropping the POP product, total profits of MSI will fall from $51,400 to $49,400, hence POP product should not be eliminated.

POP was generating a contribution margin of $5,000. Hence as long as fixed costs do not reduce by more than $5,000, it would not be profitable to eliminate POP.

Pet store ($) Grocery Getaway ($) POP Total ($) Sales revenue 80,000 75,000 155,000 Variable cost 35,000 31,000 66,000 Contribution margin 45,000 44,000 89,000 Direct fixed costs 6,000 4,900 4,700 15,600 Common fixed costs 12,000 11,250 3,750 27,000 Net operating income 27,000 27,850 (8,450) 46,400

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