MSI is considering eliminating a product from its Toddle Town Tours collection.

Question

MSI is considering eliminating a product from its Toddle Town 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 Toddle Town Tours collection follows: Segmented Income Statement for MSI's Toddle Town Tours Product Lines Post Pet Store Grocery Office Parade Geta Polkaa Sales revenue Variable costs $120,000 $115,000 $33,000 S268,000 47,000 29,000 27,000 $ 69,000 3 68,000 4,000 141,000 51,000 Contribution margin Segment margin Net operating income (oss) Less: Direct Fixed costs 7,600 7,300 100 18,000 60,700 900 S123,000 1,650 13,400 6,000 55,400 5,750 54,950 Less: Common fixed costs (750) S109,600 Allocated based on total sales dollars. 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. Effect on Profit 2. Should MSI drop the POP product? No 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. Effect on Profit

Explanation / Answer

Answer:

1

Effect on profit

-900

Working notes for the above answer:

Effect on profit

Contribution lost on POP program

-4000

Savings in direct fixed cost

3100

net loss

-900

_________________

2

No

Explanation

elimating will result in to increase the loss

____________________________________________

3

increase in net profit

300

Working notes for the above answer:

Contribution lost on POP program

-4000

Savings in direct fixed cost

3100

Savings in common fixed costs

1200

increase in net profit

300

3-b

Yes MSI should drop

Effect on profit

-900

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