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 ParadeGetaway Polka Total Sales revenue Variable costs Contribution margin Segment margin Net operating income (loss) $105,000 $100,000 $30,000 $235,000 45,000 41,000 25,000 111,000 $ 60,000 59,000 S 5,000 $124,000 18.200 S 53,000 52,600 S 200 $105,800 5,000 1,500 11,750 S 47.750 47.600 (1.300 S 94.050 Less: Direct Fixed costs 7.000 6.400 4,800 Less: Common fixed costs 5,250 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 Decrease

Explanation / Answer

1.

Effect on profit = 200 decrease

2. NO

3.

Effect on profit = 800 Increase

4. YES

Lost contribution margin from dropping the product line (5,000) Savings from avoidable fixed costs : Direct fixed costs 4,800 Net loss from dropping the product line (200)

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