Question

E7-7 Analyzing Keep-or-Drop Decision (LO 7-2, 7-5) MSI is considering eliminating a product from its ToddleTown Tours colection. This collection is aimed at children one to three years of age and includes lours" 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 Office Pet Store Parade $140,000 59,000 $ 81,000 8400 S72,600S 71,500 7,000 S 65,600 Grocery Getaway $135,000 55000 S 80,000 8,500 Total $37,000 $312,000 33,000 Poka Sales revenue Variable costs Contribution margin Less: Direct Fixed costs Segment margin Less: Common fixed costs 147,000 $4.000 $165,000 3,500 $ 500 $144,600 1,850 20.400 6.750 $ 64.750 $ (1,350) $129,000 15,600 Net operating income (loss) 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

Answer 1

Answer 1
Effect on profit	$500	Decrease
As there is segment margin of $500 will be the net effect because common fixed expense will remain
Answer 2
Decision	No
As it will result in decrease of net operating income by $500
Answer 3 a.
Effect on profit	$700	Increase
As in this case if there is loss of $500 due to margin from Post office but still as there is decrease of common fixed cost which will result as increase in income by $700 ( $1200-$500)
Answer 3 b.
Decision	Yes
As it will result in increase of net operating income by $700

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