The following information pertains
Electronic Playground, Inc. (EPI), manufactures and sells computer games. The company has several product lines based on the age range of the target market and the games marketing as educational or entertainment. EPI sells both individual games as well as packaged sets. All games are in CD format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, EPI has developed and manufactured all CDs itself as well as the accessories and packaging for all of its products.
The gaming market has traditionally been targeted at teenagers and young adults. However, the increasing affordability of computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a significant increase in sales to younger children. EPI has always included games for younger children but now wants to expand its business to capitalize on changes in the industry. The company currently has excess capacity and is investigating several possible ways to improve profitability.
Analyzing the Decision to Eliminate Unprofitable Segment
EPI 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.
EPI’s information related to the ToddleTown Tours collection follows:
Segmented Income Statement for EPI’s ToddleTown Tours Product Lines | ||||
| Pet Store Parade | Grocery Getaway | Post Office Polka | Total |
| ||||
Sales Revenue | $50,000 | $45,000 | $15,000 | $110,000 |
Variable Costs | 23,000 | 19,000 | 10,000 | 52,000 |
Contribution Margin | 27,000 | 26,000 | 5,000 | 58,000 |
Less: Direct Fixed Costs | 4,800 | 3,100 | 1,500 | 9,400 |
Segment Margin | 22,200 | 22,900 | 3,500 | 48,600 |
Less: Common Fixed Costs* | 14,400 | 12,960 | 4,320 | 31,680 |
Profit | $ 7,800 | $ 9,940 | $ (820) | $ 16,920 |
*Allocated based on total sales dollars. | ||||
EPI 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.Determine what would happen to the company’s total profit if EPI drops the POP product. What is your recommendation about the elimination?
2.Suppose that $3,700 of the common fixed costs could be avoided if the POP product line were eliminated. Would your recommendation to EPI change? Why or why not?
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