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 $3,000 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 $ 80,000 $ 75,000 $ 25,000 $ 180,000 Variable costs 35,000 31,000 20,000 86,000 Contribution margin $ 45,000 $ 44,000 $ 5,000 $ 94,000 Less: Direct Fixed costs 6,000 4,900 4,700 15,600 Segment margin $ 39,000 $ 39,100 $ 300 $ 78,400 Less: Common fixed costs* 12,000 11,250 3,750 27,000 Net operating income (loss) $ 27,000 $ 27,850 $ (3,450 ) $ 51,400

Explanation / Answer

1)

1)

Pet Store Grocery Parade Gateway Total Sales revenue 80000 75000 155000 Less: Variable Costs 35000 31000 66000 Contribution Margin 45000 44000 89000 Less: Direct Fixed Costs 6000 4900 10900 segment margin 39000 39100 78100 Less: Common Fixed Costs 27000 Net operating income (loss) 51100 Effect on profit (51400-51100) 300 Decrease 2) NO, MSI should not drop POP product 3a) Pet Store Grocery Parade Gateway Total Sales revenue 80000 75000 155000 Less: Variable Costs 35000 31000 66000 Contribution Margin 45000 44000 89000 Less: Direct Fixed Costs 6000 4900 10900 segment margin 39000 39100 78100 Less: Common Fixed Costs 24000 Net operating income (loss) 54100 3b) Net income will increase by (54100-51400) 2700

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