Question

E7-7 Analyzing Keep-or-Drop Decision [LO 7-2, 7-5] MSI is considering eliminating a product from its Toddle Town Tours collection. This collection is aimed at children one to three years of age and includes tours" of a hypothetical town. Two products, The Pet Store Parade and The Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, The Post Office Polka, have lagged the others. Several other CDs are planned for this collection, but none is ready for production. MSI's information related to the Toddle Town Tours collection follows: Segmented Income Statement for MSI's Toddle Town Tours Product Lines Sales revenue Variable costs Contribution margin Less: Direct Fixed costs Segment margin Less: Common fixed costs Net operating income (loss) Pet Store Parade $120,000 51,000 $ 69,000 7,600 $ 61,400 6,000 $ 55,400 Grocery Getaway $115,000 47,000 $ 68,000 7,300 $ 60,700 5,750 $ 54,950 Post Office Polka Total $33,000 $268,000 29,000 127,000 $ 4,000 $141,000 3,100 18,000 $ 900 $123,000 1,650 13,400 $ (750) $109,600 "Allocated based on total sales dollars. MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products. Required: 1. Calculate the incremental effect on profit if the POP product is eliminated. Effect on Profit

Answer 1

Solutions:

Solution 1: Incremental effect on Profit if POP is Eliminated Particulars Continue POP product Discontinue POP Product $0 $33,000 $29,000 $4,000 Effect on Profits of Discontinuing $33,000 $29,000 $4,000 12 Revenues Variable expenses Contribution Margin Fixed Expenses: Direct fixed cost Common Fixed cost $3,100 $3,100 $1,650 $1,650 $0 14 15 16 Net Income $750 $1,650 -$900 17 Solution 2: No, MSI should not drop POP Product. 19 20 Solution 3-a: Incremental effect on Profit if POP is Eliminated Particulars Continue POP product Discontinue POP Product 24 25 $33,000 $29,000 $4,000 Effect on Profits of Discontinuing $33,000 $29,000 $4,000 $0 27 Revenues Variable expenses Contribution Margin Fixed Expenses: Direct fixed cost Common Fixed cost $0 28 29 $3,100 $1,650 $3,100 $1,200 $450 30 31 Net Income $750 $450 32 33 34 Solution 3-b: Yes, MSI should drop POP Product. 35 38 39 40 41 43 44 47 48 49 50 51 52 Sheet582 Sheet584 Sheet585 Sheet591 Sheet