Question

MSI is considering eliminating a product from its ToddleTown 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 ToddleTown Tours collection follows: Segmented Income Statement for MSI's ToddleTown Tours Product Lines Post Pet Store Office Grocery Getaway $140,000 Polka Total Parade Sales revenue $145,000 $38,000 $323,000 Variable costs Contribution margin 61,eee 57,000 34,000 152,000 84,00e 4,000 $171,00e 83,000 Less: Direct Fixed costs 8,800 $ 74,200 8,600 3,600 21,000 $ 75,400 $150,00e 16,150 $133,850 Segment margin Less: Common fixed costs Net operating income (loss) 400 7,000 7,250 1,900 $68,150 $(1,500) 67,200 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 $1,200 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

1

Profit will decrease by the amount of segment margin of POP

Effect on Profit $400 decrease

2

No, POP product should not be dropped

3a

Profit will increase by the amount of common fixed costs avoidable less segment margin

Profit increase = 1200-400 = $800

Effect on Profit $800 increase

b

Yes, MSI should drop the POP product