5. Cawley Company makes three models of tasers. Information on the three product

Question

5. Cawley Company makes three models of tasers. Information on the three products is iven below: Tingler Shocker Stunner Sales Variable Costs Contribution Margin Fixed Costs Net Income S300,000 150,000 150,000 120,000 S500,000 200,000 300,000 230,000 S200,000 45,000 55,000 95,000 40 70 he company, feels the Stunner line should be James Watt, an executive with t discontinued to increase the company's net income Instructions a. If all fixed costs are direct fixed costs, should the Stunner line be discontinued? Why or why not? b. If all fixed costs are indirect fixed costs and the two remaining product lines must absorb Stunner's fixed costs proportionate to their sales revenue if Stunner is discontinued, should the Stunner line be discontinued? Why or why not? c. If S300,000 of indirect fixed costs have been allocated to each product line based on sales revenue and the remainder of the fixed costs are direct, should the Stunner line be discontinued? Why or why not?

Explanation / Answer

a Loss in contribution margin -55000 Avoidable fixed costs 95000 Change in net income 40000 Yes, it should be discontinued as income increases by $40000 b Change in net income = Loss in contribution margin = -55000 No, it should not be discontinued as income decreases by $55000 c Indirect fixed costs allocated to Stunner = 300000/1000000*200000=60000 Loss in contribution margin -55000 Avoidable fixed costs 35000 =95000-60000 Change in net income -20000 No, it should not be discontinued as income decreases by $20000

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