Newton 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 $30,000 (Stunner), $75,000 (Double-Set), and $30,000 (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. Tim Hunt, an executive with the company, feels the Mega-Power line should be discontinued to increase the company€™s net income.

Instructions
(a) Compute current net income for Newton Company.
(b) Compute net income by product line and in total for Newton Company if the company discontinues the Mega-Power product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)
(c) Should Newton eliminate the Mega-Power product line? Why or whynot?

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Sales Variable expenses Contribution margin Fixed expenses Net income Stunner 300,000 150,000 150,000 120,000 30,000 Double-Set $500,000 200,000 300,000 225,000 75,000 Mega-Power $200,000 140,000 60,000 90,000 (30,000)