MSI'S information related to the loddletown tours collection follows:
Segmented Income Statement for MSI's
ToddleTown Tours Product Lines
Pet Store
Grocery Getaway
Post Office
Total
Parade
Sales revenue
$ 100,000
$ 95,000
$ 29,000
$ 224,000
Variable costs
43,000
39,000
24,000
106,000
Contribution margin
$ 57,000
$ 56,000
$ 5,000
$ 118,000
Less: Direct Fixed costs
6,800
6,100
4,700
17,600
Segment margin,
$ 50,200
$ 49,900
$ 300
$ 100,400
Less: Common fixed costs*
5,000
4,750
1,450
11,200
Net operating income (loss)
$ 45,200
$ 45,150
$ (-1,150)
$ 89,200
*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.
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 $1,000 of the common fixed costs
could be avoided if the POP product line were eliminated.
3-b. Should MSI drop the POP product?
