Mohave Corp. is considering eliminating a product from its Sand Trap line of bea

Question

Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal.       

Mohave’s information related to the Sand Trap line is shown below.       

*Allocated based on total sales revenue

     
Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products.     

Required:
1-a. Complete the table given below, if Mohave Corp drops the Azul line. (Do not round intermediate calculations. Round Common Fixed Costs to the nearest whole dollar.)

  

1-b. Will Mohave’s net operating income increase or decrease if the Azul model is eliminated? By how much?

   

2. Should Mohave drop the Azul model?

     

3-a. Complete the table given below assuming that Mohave had no direct fixed overhead in its production information and the entire $51,000 of fixed cost was common fixed cost.

  

3-b. Should it the drop Azul model?

  

3-c. What is the increase or decrease in the net operating income of Mohave?

Segmented Income Statement for Mohave’s Sand Trap Beach Umbrella Products Indigo Verde Azul Total Sales revenue $ 60,000 $ 60,000 $ 30,000 $ 150,000 Variable costs 34,000 31,000 26,000 91,000 Contribution margin $ 26,000 $ 29,000 $ 4,000 $ 59,000 Less: Direct Fixed costs 1,900 2,500 2,000 6,400 Segment margin $ 24,100 $ 26,500 $ 2,000 $ 52,600 Common fixed costs* 17,840 17,840 8,920 44,600 Net operating income (loss) $ 6,260 $ 8,660 $ (6,920 ) $ 8,000

Explanation / Answer

Answer:

1

-a. Complete the table given below, if Mohave Corp drops the Azul line.

Segmented Income Statement for Mohave’s

Sand Trap Beach Umbrella Products

Indigo

Verde

Total

Sales revenue

66000

69000

135000

Variable costs

37400

35650

73050

Contribution margin

28600

33350

61950

Less: Direct Fixed costs

1900

2500

4400

Segment margin

26700

30850

57550

Common fixed costs*

21804

22796

44600

Net operating income (loss)

4896

8054

12950

B-

Will Mohave’s net operating income increase or decrease if the Azul model is eliminated? By how much?

Yes, Mohave’s net operating income increase by $4950 (12950-8000) if the Azul model is eliminated

______________________________________________

2

Should Mohave drop the Azul model?

Yes

________________________________________

3-a.

Complete the table given below assuming that Mohave had no direct fixed overhead in its production information and the entire $51,000 of fixed cost was common fixed cost.

Contribution margin from Indigo (28600-26000)

2600

Contribution margin from Verde (33,350-29000)

4350

Contribution margin lost from AZUL

-4000

Net increse in contribution margin

2950

Chage in fixed cost

0

Net change in profit if AZUL is eliminated

2950

3-b. Should it the drop Azul model?

Answer: Yes

3-C

What is the increase or decrease in the net operating income of Mohave?
Change 2950 increase profit

Segmented Income Statement for Mohave’s

Sand Trap Beach Umbrella Products

Indigo

Verde

Total

Sales revenue

66000

69000

135000

Variable costs

37400

35650

73050

Contribution margin

28600

33350

61950

Less: Direct Fixed costs

1900

2500

4400

Segment margin

26700

30850

57550

Common fixed costs*

21804

22796

44600

Net operating income (loss)

4896

8054

12950

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