Question

FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows:

	Scented	Musical	Regular	Total
Sales	$ 10,000	$15,000	$25,000	$50,000
Less: Variable expenses	7,000	12,000	12,500	31,500
Contribution margin	$ 3,000	$ 3,000	$12,500	$18,500
Less: Direct fixed expenses	4,000	5,000	3,000	12,000
Segment margin	$ (1,000)	$ (2,000)	$ 9,500	$ 6,500
Less: Common fixed expenses				7,500
Operating income (loss)				$(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.

2. Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%.

Prepare an income statement for Fun Time assuming the Scented and Musical greeting card lines are dropped.

Note: Enter all amounts as positive numbers except subtotals, if applicable.

FunTime
Income Statement
(Regular Greeting Cards only)
Sales	$20,000
Less: Variable expenses	10,000
Contribution margin	$10,000
Less: Fixed expenses	?
Operating income (loss)	$ ?

3. 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?

Prepare segmented income statements assuming the Musical line is dropped and advertising is increased.

Note: Enter all amounts as positive numbers except subtotals, if applicable.

FunTime
Segmented Income Statement
	Scented	Regular	Total
Sales	$13,000	$22,500	$35,500
Less: Variable expenses	9100	11250	20350
Contribution margin	3900	11250	15150
Less: Direct fixed expenses	?	3000	?
Segment margin	?	8250	?
Less: Common fixed expenses			7500
Operating income (loss)			?

Part one

Bock Required: 1. Im 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%. Prepare segmented income statements based on Jim's assumptions Note: Enter all amounts as positive numbers except subtotals, if applicable. FunTime Segmented Income Statement Scented Sales $ 1,000 $ 19.500 9,100 15.000 Less: Variable expenses Contribution margin 1,00 Less Directed expenses Segment margin Less Common fed peres Operating Income (s) If you were Kathy, how would you react to this information? Kathy should act this proposal. The 30% sales increase, coupled with the increased advertising, reduce the loss. Both scented and musical product line profits increase. However, more must be done. If the scented and musical product margins remain negative, the two products may need to be dropped

Part two

Answer 1

1)
	Scented	Musical	Regular	Total
Sales	$13,000.0	$19,500.0	$25,000	$57,500.0
Less: Variable expenses	$9,100.0	$15,600.0	$12,500	$37,200.0
Contribution margin	$3,900.0	$3,900.0	$12,500.0	$20,300.0
Less: Direct fixed expenses	4,250	5,750	3,000	$13,000.0
Segment margin	($350.0)	($1,850.0)	$9,500.0	$7,300.0
Less: Common fixed expenses				$7,500.0
Operating income (loss)				($200.0)
Kathy  should  accept  this  proposal.  The  30  percent  sales  increase,  coupled with  the increased  advertising,  reduces  the  loss  from $1,000  to  $200. Both scented  and musical product-line  profits  increase.  However,  more  must  be done.  If  the  scented  and  musical product  margins  remain  negative,  the  two products may need to be dropped
2)
FunTime
Income Statement
(Regular Greeting Cards only)
Sales	$ 20,000.00
Less: Variable expenses	$ 10,000.00
Contribution margin	$ 10,000.00
Less: Fixed expenses (3000+7500)	$ 10,500.00
Operating income (loss)	$     (500.00)
While dropping the two lines results  in a $500 loss versus  the original $1,000 loss,  it  is  worse  than  the  alternative  offered  in  requirement  1.    Other  options need to be developed
3)
FunTime
Segmented Income Statement
	Scented	Regular	Total
Sales	$13,000.0	$ 22,500.00	$ 35,500.00
Less: Variable expenses	$9,100.0	$ 11,250.00	$ 20,350.00
Contribution margin	$3,900.0	$11,250.0	$ 15,150.00
Less: Direct fixed expenses	$   4,250.00	$   3,000.00	$   7,250.00
Segment margin	$     (350.00)	$   8,250.00	$   7,900.00
Less: Common fixed expenses			$   7,500.00
Operating income (loss)			$      400.00