Shatner 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. Jim Kirk, 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 Shatner Company.

(b) Compute net income by product line and in total for Shatner Company if the company discontinues the Mega-Power product line.

(c) Should Shatner eliminate the Mega-Power product line? Why or why not?

Transcribed Image Text:

Stunner Double-Set Mega-Power Sales Variable expenses Contribution margin Fixed expenses Net income $300,000 $200,000 1 $500,000 150,000 60,000 225,000 90,000 $(30,000) 120,000 $ 30,000 $ 75,000