Question

Chapter 7 Assignment i Saved 10 Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal. 10 points Mohave's information related to the Sand Trap line is shown below. eBook Segmented Income Statement for Mohave's Sand Trap Beach Umbrella Products Indigo Verde Azul Total Sales revenue $ 60,000 $60,000 $30,000 $150,000 Variable costs 34,000 31,000 26,000 9 1,000 Contribution margin $ 26,000 $ 29,000 $4,000 $ 59,000 Less: Direct fixed costs 1,900 2,500 2,000 6,400 Segment margin $ 24,100 $ 26,500 $2,000 $ 52,600 Common fixed costs* 17,840 17,8408 ,920 44,600 Net operating income (loss) $ 6,260 $ 8,660 $ (6,920) $ 8,000 Print References "Allocated based on total sales revenue Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products. Required: 1-a. Complete the table given below, assuming Mohave Corp. drops the Azul line. 1-b. Will Mohave's net operating income increase or decrease if the Azul model is eliminated? By how much? 2. Should Mohave drop the Azul model? 3-a. Complete the table given below assuming that Mohave had no direct fixed overhead in its production information and the entire $51,000 of fixed cost was common fixed cost. 3-b. Should Mohave drop the Azul model? 3-c. What is the increase or decrease in the net operating income of Mohave? Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2 Req ЗА Req 3B Req 3C Complete the table given below, assuming Mohave Corp. drops the Azul line. (Do not round intermediate calculations. Round Common Fixed Costs to the nearest whole dollar.) Indigo Verde Total Sales Revenue Variable Costs Contribution Margin Direct Fixed Costs Segment Margin Common Fixed Costs Net Operating Income (Loss) L Req1A Req 1B >

Answer 1

Indigo solution: 1a) Sales Revenue Variable Costs Contribution Margin Direct Fixed Costs Segment Margin Commonn Fixed Costs Net Operating Income (Loss) Verde Total 66000 69000 135000 3740035650 73050 28600 33350 61950 1900 2500 4400 26700 30850 57550 21804 22796 44600 4896 8054 12950 1b) Increase in net operating income (loss) by $4950 (12950-8000) 2) Yes, as result in increase in net operating income by $4940 3a) Contribution Margin Gained on Indigo=26000*0.10 Contribution Margin Ganined on Verde=29000*0.15 Contribution Margin Lost on Azul Net increase in Contribution Margin Change in Fixed Costs Net Change in Profit if Azul is Eliminated Change in Contribution Margin 2600 4350 -4000 2950 2950 3b) Yes , as result in increase in net operating income by $2950 3c) Increase in net operating income (loss) by $2950