MSI is considering eliminating a product from its ToddleTown Tours collection. T

Question

MSI 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.

MSI’s information related to the ToddleTown Tours collection follows:

      
*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.



2. Should MSI drop the POP product?

3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $2,500 of the common fixed costs could be avoided if the POP product line were eliminated.



3-b. Should MSI drop the POP product?

Segmented Income Statement for MSI’s ToddleTown Tours Product Lines Pet Store Parade Grocery Getaway Post Office Polka Total Sales revenue $ 60,000 $ 55,000 $ 21,000 $ 136,000 Variable costs 27,000 23,000 15,000 65,000 Contribution margin $ 33,000 $ 32,000 $ 6,000 $ 71,000 Less: Direct Fixed costs 5,200 3,700 4,100 13,000 Segment margin $ 27,800 $ 28,300 $ 1,900 $ 58,000 Less: Common fixed costs* 12,000 11,000 4,200 27,200 Net operating income (loss) $ 15,800 $ 17,300 $ (2,300 ) $ 30,800

Explanation / Answer

1 Contribution margin loss -6000 Avoidable Fixed costs 4100 Incremental effect on profit -1900 profit decreases by $1900 2 Yes 3a Contribution margin loss -6000 Avoidable Fixed costs 6600 Incremental effect on profit 600 3b No

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