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 revenue.      

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.  

3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $3,700 of the common fixed costs could be avoided if the POP product line were eliminated.

Segmented Income Statement for MSI’s ToddleTown Tours Product Lines Pet Store Parade Grocery Getaway Post Office Polka Total Sales revenue $ 50,000 $ 45,000 $ 15,000 $ 110,000 Variable costs 23,000 19,000 10,000 52,000 Contribution margin $ 27,000 $ 26,000 $ 5,000 $ 58,000 Less: Direct Fixed costs 4,800 3,100 3,500 11,400 Segment margin $ 22,200 $ 22,900 $ 1,500 $ 46,600 Less: Common fixed costs* 14,400 12,960 4,320 31,680 Net operating income (loss) $ 7,800 $ 9,940 $ (2,820 ) $ 14,920

Explanation / Answer

Incremental effect on profit = common fixed costs avoidable-Segment margin = 3700-1500 = $2200

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