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 Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, Post Office Polka $($POP$),$ 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 $ $120,000$ $ $115,000$ $ $33,000$ $ $268,000$

Variable costs $51,00047,00029,000127,000$

Contribution margin $ $69,000$ $ $68,000$ $ $4,000$ $ $141,000$

Less: Direct Fixed costs $7,6007,3003,10018,000$

Segment margin $ $61,400$ $ $60,700$ $ $900$ $ $123,000$

Less: Common fixed costs$*$Footnote asterisk $6,0005,7501,65013,400$

Net operating income $($loss$)$ $ $55,400$ $ $54,950$ $ $(-750)$ $ $109,600$

$*$Footnote asteriskAllocated 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 rating: 100% (QA)

To calculate the incremental effect on profit if the POP product is eliminated we need to compare th... View the full answer