Question

Cawley Company makes three models of tasers. Information on the three products is given below. Sales Variable expenses Contribution margin Fixed expenses Net income Tingler Shocker Stunner $304,000 $496,000 $200,000 147,900 192,600 143,100 156,100 303,400 56,900 118,984 226,016 94,000 $37,116 $77,384 $(37,100) Fixed expenses consist of $296,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $29,000 (Tingler), $79,200 (Shocker), and $34,800 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out. James Watt, an executive with the company, feels the stunner line should be discontinued to increase the company's net income. (a) Compute current net income for Cawley Company. Net income $ Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $296,000 common costs to the two remaining product lines based on their relative sales.) Tingler Net Income $ Shocker Net Income $ Total Net Income (c) Should Cawley eliminate the Stunner product line? Why or why not? Net income would from $ to $

Answer 1

1 (a) 2 Net Income $ 77,400 ($37,116 + $77,384 - $37,100)

(b) 5 Tingler Net Income $ 5 Shocker Net Income $ - Total Net Income $ 14,620 40,680 55,300

2 Sales 3 Variable Expenses 1 Contribution Margin 5 Fixed Expenses Tingler 3,04,000 $ 1,47,900 $ 1,56,100 1,41,480 ($292,000 * $304,000/$800,000) + $29,000 14,620 Shocker $ 4,96,000 $ 1,92,600 $ 3,03,400 $ 2,62,720 ($292,000 * $496,000/$800,000) + $29,000 $ 40,680 U - Net Income

(c) Cawler should not eliminate the stunner product line 2 Net income would decrease from $77,400 to $55,300