Question

TUS LUULUUII. WULJIVIC IS I Cauv TUI IUUULLUIT. Required information Grocery Segmented Income Statement for MSI's Toddle Town Tours Product Lines Post Pet Store office Parade Getaway - : - Polka Total Sales revenue $105,000 $100,000 $30,000 $235,000 Variable costs 45,000 41,000 25,000 111,000 Contribution margin $ 60,000 $ 59,000 $ 5,000 $124,000 Less: Direct Fixed costs 7,000 6,400 4,800 18,209 Segment margin $ 53,000 $ 52,600 200 $105,800 Less: Common fixed costs* 5,250 5,000 1,500 11,750 Net operating income (loss) $ 47,750 $ 47,600 $(1,300) $ 94,050 *Allocated based on total sales revenue. 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. 2. Should MSI drop the POP product? 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,000 of the common fixed costs could be avoided if the POP product line were eliminated. 3-b. Should MSI drop the POP product?

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refr to the supporting sheet.

А B D E F G H Answer Part 1) If POP is eliminated = Saing in direct costs - loss of contribution margin = 4800-5000 --$ 200 = Loss of $ 200 So it means profit will reduce by $ 200 1 2 Part 2) NO, POP product should not be dropped as it leads to reduction in profit. 1 5 Part 3) 5 If POP is eliminated 7 = saving in fixed costs - loss of contribution margin 3 = (4800+1000) - 5000 = $800 = Increase in profit by $ 800 2 So it means profit will increase by $ 800 3 Part 4) Yes, POP product should be leminated as it leads to increase in profit by $ 800 7 Sheet1 Sheet2 Sheet3 eady A e W X