Question

Unit9

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 $298,000 154,700 143,300 120,784 $22,516 Shocker $502,000 201,500 300,500 235,216 $65,284 Stunner $200,000 135,600 64,400 96,000 $(31,600) 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), $80,600 (Shocker), and $34,400 (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 s tos Click if you would like to Show Work for this question: Open Show Work

Answer 1

	Tingler		Shocker		Stunner		Total
Sales	2,98,000		5,02,000		2,00,000		10,00,000
(Variable cost)	1,54,700		2,01,500		1,35,600		4,91,800
Contribution	1,43,300		3,00,500		64,400		5,08,200
(Fixed cost)	1,20,784		2,35,216		96,000		4,52,000
Net income	22,516		65,284		-31,600		56,200
Bifurcation of fixed cost
Common Cost	91,784	(3,08,000*2,98,000/10,00,000)	1,54,616	(3,08,000*5,02,000/10,00,000)	61,600	(3,08,000*2,00,000/10,00,000)	3,08,000
Direct fixed expenses	29,000		80,600		34,400		1,44,000
	1,20,784		2,35,216		96,000		4,52,000
a)
Current net income	56,200
b)
	Tingler		Shocker		Total
Sales	2,98,000		5,02,000		8,00,000
(Variable cost)	1,54,700		2,01,500		3,56,200
Contribution	1,43,300		3,00,500		4,43,800
Common Cost	1,14,730	(3,08,000*2,98,000/8,00,000)	1,93,270	(3,08,000*5,02,000/8,00,000)	3,08,000
Direct fixed expenses	29,000		80,600		1,09,600
Net income	-430		26,630		26,200
C)
Company should not eliminate Stunner
Net income will	Increase	from	26,200	56,200