Question

Cawley Company makes three models of tasers. Information on the three products is given below. Sales Variable expenses Contribution margin Fixed expenses Net income Tingler Shocker Stunner $298,000 $502,000 $200,000 145,000 198,600 138,500 153,000 303,400 61,500 120,784 235,016 96,100 $32,216 $68,384 $(34,600) Fixed expenses consist of $308,000 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), $80,400 (Shocker), and $34,500 (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. 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 $308,000 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 from $ to $

Answer 1

a.) The current net income for Cawley Company is:
	Tingler	Shocker	Stunner	Total
Sales	$298,000	$502,000	$200,000	$1,000,000
Variable expenses	1,45,000	1,98,600	1,38,500	4,82,100
Contribution margin	1,53,000	3,03,400	61,500	5,17,900
Fixed expenses	1,20,784	2,35,016	96,100	4,51,900
Net income	$32,216	$68,384	$(34,600)	$66,000
Net Income	$	66,000
b.) Net Income if the company discontinues Stunner will be:
	Tingler	Shocker	Stunner	Total
Sales	$298,000	$502,000	-	$8,00,000
Variable expenses	1,45,000	1,98,600	-	3,43,600
Contribution margin	1,53,000	3,03,400	-	4,56,400
Additional Fixed expenses	29,000	80,400	-	1,09,400
Product Margin	$124,000	$223,000		$347,000
Common Fixed Expenses				3,08,000
Net Income				$39,000
c.) The company should not eliminate the Stunner product line due to reduction in the net income.