Clarington Company makes three models of phasers. Information on the three products is given below:

Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $35,000 (Stunner), $70,000 (Double-Set), and $40,000 (Mega-Power). 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.
John Liu, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.
Instructions
(a) Calculate current net income for Clarington Company.
(b) Calculate net income by product line and in total for Clarington Company if the company discontinues the Mega-Power product line.
(c) Should Clarington eliminate the Mega-Power product line? Why or why not?

Transcribed Image Text:

Double-Set $480,000 200,000 280,000 225,000 $ 55,000 Mega-Power Sales Variable expenses Contribution margin Fixed expenses Net income Stunner $320,000 160,000 160,000 120,000 40,000 200,000 130,000 70,000 100,000 $ (30,000)