Question

Sales Variable expenses Contribution margin Fixed expenses Net income Tingler $298,000 150,900 147,100 121,380 $25,720 Shocker $502,000 206,400 295,600 234,920 $60,680 Stunner $200,000 136,900 63,100 96,600 $(33,500) Fixed expenses consist of $310,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $29,000 (Tingler), $79,300 (Shocker), and $34,600 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company's net income. (a) Compute current net income for Cawley Company. Net income (b) Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $310,000 common costs to the two remaining product lines based on their relative sales.) Tingler Net Income Shocker Net Income Total Net Income Should Cawley eliminate the Stunner product line? Why or why not? Net income would

Answer 1

a	Net Income	$        52,900
	25720+60680-33500
b		Tinger	Shocker	Total
	Sales	$      298,000	$ 502,000	$ 800,000
	Variable Expenses	$      150,900	$ 206,400	$ 357,300
	Contribution Margin	$      147,100	$ 295,600	$ 442,700
	Fixed Expense - Unique	$        29,000	$   79,300	$ 108,300
	Fixed Expense - Common	$      115,475	$ 194,525	$ 310,000
	Net Income	$          2,625	$   21,775	$   24,400
c	No.
	Net Income would reduce from $52,900 to $24,400

Common Fixed Expense
Tinger	310000*298000/800000	$ 115,475
Shocker	310000*502000/800000	$ 194,525