Question

Can you explain your thought process behind how you got the answers to 8-56? It appears that you converted to unit cost? the isbn is 978-1-337-11577-3.

Problem 8-56 Segmented Income Statement, Management Decision Making FunTime Company produces three lines of greeting cards: scented, musical, and regular Segmented income statements for the past year are as follows: Sales Less: Variable expenses Contribution margin Less: Direct fixed expenses Segment margin Less: Common fixed expenses Operating income (loss) Scented $10,000 7,000 $ 3.000 4,000 $ (1,000) Musical $15.000 12.000 $ 3.000 5.000 $(2.000) Regular $25.000 12.500 $12.500 3.000 $ 9.500 Total $50,000 31.500 $18,500 12,000 $ 6,500 7.500 $(1,000) Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTime's vice president of marketing Required: 1. CONCEPTUAL CONNECTION Jim believes that by increasing advertising by $1,000 ($250 for the scented line and $750 for the musical line), sales of those two lines would increase by 30%. If you were Kathy, how would you react to this information? 2. CONCEPTUAL CONNECTION Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Given this information, would it be profitable to eliminate the scented and musical lines? 3. CONCEPTUAL CONNECTION Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising the option described in Requirement 1) and eliminating one of the lines be beneficial Identify the best combination for the firm.

Answer 1

CONCEPTUAL CONNECTION - 1
	Scented	Musical	Regular	Total
Sales	$13,000	$19,500	$25,000	$57,500
Less: Variable expenses	$9,100	$15,600	$12,500	$37,200
Contribution margin	$3,900	$3,900	$12,500	$20,300
Less: Direct fixed expenses	$4,250	$5,750	$3,000	$13,000
Segment margin	($350)	($1,850)	$9,500	$7,300
Less: Common fixed expenses				($7,500)
Operating income				($200)
Although, the contribution margins increase due to increased advertising,both the lines still
incurred losses even though the quantum of losses has decreased.
CONCEPTUAL CONNECTION - 2
	Scented	Musical	Regular	Total
Sales			$20,000	$20,000
Less: Variable expenses			$10,000	$10,000
Contribution margin			$10,000	$10,000
Less: Direct fixed expenses			$3,000	$3,000
Segment margin			$7,000	$7,000
Less: Common fixed expenses				($7,500)
Operating income				($500)
With the elimination of scented and musical lines, although the operating losses have been
reduced but the segment profits of the regular lines have also decreased.
CONCEPTUAL CONNECTION - 3
	Scented	Musical	Regular	Total
Sales	$13,000		$22,500	$35,500
Less: Variable expenses	$9,100		$11,250	$20,350
Contribution margin	$3,900		$11,250	$15,150
Less: Direct fixed expenses	$4,250		$3,000	$7,250
Segment margin	($350)		$8,250	$7,900
Less: Common fixed expenses				($7,500)
Operating income				$400
Since the segment loss for the scented line after increased advertising was lower than the
musical lines, we would eliminate the musical lines. The company would continue the regular
and scented lines(with increased advertising).The result would be that the company would
earn an operating income $ 400 in comparision to operating loss of $ 1,000 in the current
scenario.
Hence,the best combination for the firm would be to continue regular line with the scented line
with the increased advertising costs.
Note-
There is no requirement for computation of unit costs.
The answers can be computed by putting the revised values as per the individual conceptual
notes