E7-7 Analyzing Keep-or-Drop Decision [LO 7-2, 7-5] 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 "ours" 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: Segmented Income Statement for MSI's Toddle Town Tours Product Lines Sales revenue Variable costs Contribution margin Less: Direct Fixed costs Segment margin Less: Common fixed costs Net operating income (loss) Pet Store Parade $105,000 45,000 $ 60,000 7.000 $ 53,000 5,250 $ 47,750 Grocery Getaway $100,000 41,000 S 59,000 6,400 S 52,600 5,000 $ 47,600 Post Office Polka Total $30,000 $235,000 25,000 111,000 $5,000 $124,000 4,800 18,200 $ 200 $105,800 1.500 11,750 $(1,300) S 94,050 * Allocated based on total sales dollars. 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. Effect on Profit 2. Should MSI drop the POP product? Yes No 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,000 of the common fixed costs could be avoided if the POP product line were eliminated. Effect on Profit 3-b. Should MSI drop the POP product? Yes No