Question

Sunland Company makes three models of tasers. Information on the three products is given below.

		Tingler		Shocker		Stunner
Sales		$296,000		$504,000		$200,000
Variable expenses		151,700		207,900		138,200
Contribution margin		144,300		296,100		61,800
Fixed expenses		117,800		231,800		95,000
Net income		$26,500		$64,300		$(33,200)

Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $29,000 (Tingler), $80,600 (Shocker), and $35,000 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out.

James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company’s net income

Compute net income by product line and in total for Sunland Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)

Tingler Net Income		$
Shocker Net Income		$
Total Net Income		$

(c)

Should Sunland eliminate the Stunner product line?

Net income would decrease from   $_____________ to $_______________

Answer 1

Answer:

Tingler Net Income	$     4,300.00
Shocker Net Income	$   26,500.00
Total	$   30,800.00

Calculations:

	Tingler	Shocker
Sales	$ 296,000.00	$ 504,000.00
Variable expenses	$ 151,700.00	$ 207,900.00
Contribution margin	$ 144,300.00	$ 296,100.00
Fixed expenses	$ 140,000.00	$ 269,600.00
Net income	$     4,300.00	$   26,500.00
Total Income	$ 30,800.00

Answer c:

Should Sunland eliminate the Stunner product line? NO

Net income would decrease from $ 57,600 to $ 30,800.

In case of any doubt, please comment.