Question

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

		Tingler		Shocker		Stunner
Sales		$298,600		$497,400		$197,000
Variable expenses		152,300		207,900		136,000
Contribution margin		146,300		289,500		61,000
Fixed expenses		119,881		229,722		93,797
Net income		$26,419		$59,778		$(32,797)

Fixed expenses consist of $299,900 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $29,700 (Tingler), $79,500 (Shocker), and $34,300 (Stunner). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a 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.

a. Compute current net income for Cawley Company.

b. Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $299,900 common costs to the two remaining product lines based on their relative sales.) (Round answers to the nearest whole dollar, e.g. 5,275.)

Answer 1

Answer a.

Net income for Cawley Company.

	Tingler	Shocker	Stunner	Total
Sales	$298,600	$497,400	$197,000	$993,000
Variable expenses	152,300	207,900	136,000	496,200
Contribution margin	146,300	289,500	61,000	496,800
Fixed expenses	119,881	229,722	93,797	443,400
Net income	$26,419	$59,778	$(32,797)	$53,400

Answer b.

Net income by product line and in total for Cawley Company

	Tingler	Shocker	Stunner	Total
Sales	$298,600	$497,400	$0	$796,000
Variable expenses	152,300	207,900	0	360,200
Contribution margin	146,300	289,500	0	435,800
Additional fixed expenses	29,700	79,500	0	109,200
Common fixed expenses [Note]	112,500	187,400	0	299,900
Net income	$4,100	$22,600	$0	$26,700

Note:

Common fixed expenses for Tingler = ($298,600 / $796,000) * $299,900 = $112,500

Common fixed expenses for Shocker = ($497,400 / $796,000) * $299,900 = $187,400