Question

Two products, The Pet Store Parade and The e away have impressive sales. However sales or r e t Din MSI is consc enng el ina ng product tr ts TodcleTown Tours collection. This collecton s ared t ?ld en one tothree years o age and ncludes "Yours of a the collection, The Post Office Poka have lagged the ohers. Several other CDs are planned for this coilection, but none is ready for production. potat al to ocery d MSI's infomation related to the Toddle Town Tours colection follows Sogmented Income Statement for MSI's ToddleTown Tours Product Lines Pet Store Grocery Office a 150 000-135,000 . T8505 ?9D5T 320.00 3160000 Sales revenue 29.000 25.000 14.000 68.000 Less: Direct Fixed oots3 00303 3.800 65.400 Less: Common ixed costs 13.000 2.000 4400 29.400 $17,600 $19,000 s(600) s 36.000 Contribu on magn Segment margin Net operating income 5,400 4,000 4.200 Alocated based on total sales dolars. MSI has determined that eiminaton of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fxed ovemead currently allocated to the POP product would be redistributed to the remaning two products. 1. Calculate the incremental efect on profs if the POP product is eiminared 2. Should MSI drop the POP product? Yes No 3-a. cacuate re increrernel effect on pront irtre POP oduct s elminated. Suooose ?at $4.000 or the common nxea costs could be avoided r the POP Droduct line were elmineied. 3-b. Snoula MSI drop tne POP product? Yes No

Answer 1

Answer 1

Note : If POP is eliminated than the contribution margin lost on POP will reduce the overall profit from its current level. The direct fixed cost associated with POP will be a saving in cost as with the elimination of POP , the company will not borne that expense. Allocated fixed cost of POP will now be borne by other two products

Contribution margin lost on POP = $8,000

Saving in direct fixed cost = $4,200

Incremental profit / (loss) = Saving in direct fixed cost - Contribution margin lost on POP

=  $4,200 - $8,000 = ($3,800)

Effect on profit $3,800 decrease

Answer 2

No

Explanation : As the elimination of POP will generate incremental loss of $3,800 , thus the company should not drop POP .

Answer 3

Contribution margin lost on POP = $8,000

Saving in direct fixed cost = $4,200

Saving in allocated fixed cost = $4,000

Incremental profit / (loss) = Saving in direct fixed cost + Saving in allocated fixed cost - Contribution margin lost on POP

=  $4,200 + $4,000 - $8,000 = $200

Effect on profit $200 increase

Answer 3a

Yes

Explanation : As the elimination of POP will generate incremental profit of $200 , thus the company should drop POP .