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:

Segmented Income Statement for MSI’s
ToddleTown Tours Product Lines
	Pet Store Parade			Grocery Getaway			Post Office Polka				Total
Sales revenue	$	150,000		$	145,000		$	39,000			$	334,000
Variable costs		63,000			59,000			35,000				157,000
Contribution margin	$	87,000		$	86,000		$	4,000			$	177,000
Less: Direct Fixed costs		8,800			9,100			3,700				21,600
Segment margin	$	78,200		$	76,900		$	300			$	155,400
Less: Common fixed costs*		7,500			7,250			1,950				16,700
Net operating income (loss)	$	70,700		$	69,650		$	(1,650	)		$	138,700

*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 $1,200 of the common fixed costs could be avoided if the POP product line were eliminated.

3-b. Should MSI drop the POP product?

Answer 1

1.MSI
	Continue POP	Discontinue POP	Differential Effect on Income
Revenues	39,000	0	39,000
Cost
Variable costs	35,000	0	35,000
Direct fixed costs	3700	0	3,700
Fixed costs
Common fixed costs	1,950	1950	0
Income (loss)	-1,650	-1,950	300
2. MSI should not drop the POP product as it will reduce the net income by $ 300.
3.MSI
	Continue POP	Discontinue POP	Differential Effect on Income
Revenues	39,000	0	39,000
Cost
Variable costs	35,000	0	35,000
Direct fixed costs	3700	0	3,700
Fixed costs
Common fixed costs	1,950	750	1,200
Income (loss)	-1,650	-750	-900
MSI should drop the POP product as there will be savings of $ 900