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 Mohave Corp is considering eliminating a product from its Sand Trap ine of beach umbrelas. 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 umbrelas, have impressive sales. However, sales for the Arul model have been dismal Mohave's Information related to the Sand Trap line is shown below Icome Statement for Mohave's Sand Trap Beach Umbrela Products Sales revenue Variable costs $00,000 $60,000 $30,000 $150,000 34,000 31000 26,000 91.000 $26,000 $29,000 $ 4,000 $ 59,0C0 1,9002,5002,000 6,420 Contrbution margin Leas: Direct Fixed costs Segment Common fxed costs 17,840 17,8408,920 44 800 $6,260 $8.660-69202-am Nt operating income (loss) Alocated based on total sales revenue Mohave has determined that eliminating the And model would cause sales of the indigo and Verde models to increase by 10 percent and 15 peroent, respectively Varlable costs for these two models food oosts would be redsreuted to the remaining two would increase proportionately. Although the direct fixed costs could be elminated, the common foxed costy are unavoidable. The common Required: Complete tn table given below, f Mohave Corp dogs te Azul ine. 'Do not round intermedlatl akatations. Round Common Pand Costs to me nearest whole dolarj Sales Revenue Contribuion Mrgin Direct Fued Costs Common Fixed Cots

Explanation / Answer

Dear Student,

Ans 1-a)

Ans 1-b) If Azul Model is eliminated, Net Operating Income is increased and increase is by $ 5,350;

Ans 2) Since dropping Azul Model increases Net Operating income, Mohave should drop it;

Regards,

Indigo Verda Total Sales Revenue (A) 66,000 69,000 135,000 =(60,000*110%) =(60,000*115%) Variable Costs (B) 37,400 35,650 73,050 =66,000*(34,000/60,000) =69,000*(31,000/60,000) Contribution Margin (A)-(B) 28,600 33,350 61,950 Direct Fixed Costs -1,900 -2,500 -4,400 Segment Margin 26,700 30,850 57,550 Common Fixed Costs -22,000 -22,200 -44,200 =8920/135,000*66,000 =8920/135,000*69,000 Net Operating Income (Loss) 4,700 8,650 13,350

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.