Question

Sunland Company makes three models of tasers. Information on the three products is given below. Sales Variable expenses Contribution margin Fixed expenses Net income Tingler $296.000 151,700 144.300 117.000 $26.500 Shocker Stunner $504,000 $200,000 207,900 139,200 296,100 61,800 231.800 95.000 $64,300 $(33,200) Fixed expenses consist of $300,000 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), 580,600 (Shocker), and $35.000 (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 Sunland Company. Net income $ Compute net income by product line and in total for Sunland Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.) Tingler Net Income s Shocler Net Income S Total Net Income 5 Should Sunland eliminate the Stunner product line? Why or why not? Net income would from to $

* For (c) - Should Sunland eliminate the Stunner product line? Y/N

Why or why not? Net income would INCREASE/DECREASE from $______ to $_______

thank you!

Answer 1

Answer:

(a) The Current net Income for Sunland company is $26500+$64300-$33200 = $57600

(b) The net income of Sunland Company if the stunner product line discontinued is $ 30800 ($4300+26500)

	Tingler	Shocker
Sales	$ 296000	$ 504000
Variable Expenses	151700	207900
Contribution	144300	296100
Fixed Expenses*	140000	269600
Net Income	4300	26500

* Fixed Expenses is calculated as:

	Tingler	Shocker
Fixed Expenses as common stock , $ 300000 allocated on the basis of sales that is 296:504 ratio	111000	189000
Direct Fixed Expenses	29000	80600
Total	140000	269600

(c) No, the Sunland company should not eliminate the stunner product line.

Reason: If the stunner product line get eliminated than there will be rise in the fixed expenses of common costs, which is allocated on the basis of sales,between rest of the product lines which will lead to decrease in the net income.

The Net income will Decrease from $ 57600 to $ 30800