Question

Clarington Company makes three models of phasers. Information on the three products is given below: Sales Variable expenses Contribution margin Stunner $298,000 146,000 152,000 118,000 Double-Set $447,000 198,500 248,500 205,700 $42,800 Mega-Power $186,250 138,000 48,250 83,800 Fixed expenses Net income $34,000 ($35,550) Fixed expenses consist of $273,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,300 (Double-Set), and $29,200 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is discontinued. John Liu, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.

Answer 1

Calculation of Net Income including Mega-Power
	Stunner	Double-Set	Mega-Power	Total
Sales	$               2,98,000	$                  4,47,000	$                 1,86,250	$        9,31,250
Variable expenses	$               1,46,000	$                  1,98,500	$                 1,38,000	$        4,82,500
Contirbution margin	$               1,52,000	$                  2,48,500	$                    48,250	$        4,48,750
Fixed expenses:
Allocated Fixed Costs	$                  30,000	$                     75,300	$                    29,200	$        1,34,500
Common Fixed Costs	$                  87,360	$                  1,31,040	$                    54,600	$        2,73,000
Total Fixed expenses	$               1,17,360	$                  2,06,340	$                    83,800	$        4,07,500
Net Income	$                  34,640	$                     42,160	$                   -35,550	$           41,250
Calculation of Net Income excluding Mega-Power
	Stunner	Double-Set	Total
Sales	$               2,98,000	$                  4,47,000	$                 7,45,000
Variable expenses	$               1,46,000	$                  1,98,500	$                 3,44,500
Contirbution margin	$               1,52,000	$                  2,48,500	$                 4,00,500
Fixed expenses:
Allocated Fixed Costs	$                  30,000	$                     75,300	$                 1,05,300
Common Fixed Costs	$               1,09,200	$                  1,63,800	$                 2,73,000
Total Fixed expenses	$               1,39,200	$                  2,39,100	$                 3,78,300
Net Income	$                  12,800	$                       9,400	$                    22,200
Clarington Should eliminate the Mega-Power line. Elimination of line would cause the net income to decrease