Question

Coronado Company makes three models of tasers. Information on the three products is given below.

Tingler		Shocker		Stunner
Sales		$300,000		$500,000		$200,000
Variable expenses		152,500		198,500		137,400
Contribution margin		147,500		301,500		62,600
Fixed expenses		121,200		232,100		95,100
Net income		$26,300		$69,400		$(32,500)

Fixed expenses consist of $304,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $30,000 (Tingler), $80,100 (Shocker), and $34,300 (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 Coronado Company.

Net income

$

(b)

Compute net income by product line and in total for Coronado Company if the company discontinues the Stunner product line. (Hint: Allocate the $304,000 common costs to the two remaining product lines based on their relative sales.)

Tingler Net Income		$
Shocker Net Income		$
Total Net Income		$

(c)

Should Coronado eliminate the Stunner product line?

                                                          NoYes

Why or why not?

Net income would                                                           increasedecrease from $  to $  .

Answer 1

a.

Net Income

$ 63,200

Current net income = $ 26,300 + $ 69,400 - $ 32,500 = $ 63,200.

b.

Tingler Net Income	$ 3,500
Shocker Net Income	31,400
Total Net Income	$ 34,900

	Tingler	Shocker
Contribution Margin	$ 147,500	$ 301,500
Direct fixed expenses	30,000	80,100
Common fixed expenses	114,000	190,000
Net Income	$ 3,500	$ 31,400

c. No.

Net income would decrease from $ 63,200 to $ 34,900.