Seats Galore sells 3 models of deck chairs: Blue Magoo, Red Ahead, and Green Seen. Operating results
Question:
Seats Galore sells 3 models of deck chairs: Blue Magoo, Red Ahead, and Green Seen. Operating results for June are below:
Blue Magoo | Red Ahead | Green Seen | Total | |
Units sold | 4,000 | 4,500 | 3,500 | 12,000 |
Revenue | $36,000 | $22,500 | $35,000 | $93,500 |
Variable departmental costs | 14,000 | 13,500 | 17,500 | 45,000 |
Direct fixed costs | 6,000 | 4,000 | 5,000 | 15,000 |
Allocated fixed costs | 8,000 | 9,000 | 7,000 | 24,000 |
Net income | $ 8,000 | ($ 4,000) | $ 5,500 | $ 9,500 |
a. If Red Ahead is discontinued, management estimates that sales of Blue Magoo will increase by 20%. In good form, prepare an incremental analysis to determine if Red Ahead should be discontinued.
b. What qualitative factors should Seats Galore’s managers consider?
c. Should Red Ahead be discontinued based solely on quantitative aspects? Briefly justify your response.
d. Without creating new income statements, and using your results from your analysis in part A, determine the amount of the company’s new net income if Red Ahead is discontinued. Show your calculations.
Expert Answer:
