MSI is considering eliminating a product from its Toddle Town 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 Toddle Town Tours collection follows:

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. Will MSI's net operating income increase or decrease if the POP product is eliminated? By how much?
2. Should MSI drop the POP product?
3. Suppose that $3,700 of the common fixed costs could be avoided if the POP product line were eliminated. Would your recommendation to MSI change? Why or why not?

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