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Segmented Income Statement, Management Decision Making FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows: Scented Musical Regular Total Sales $ 10,000 $15,000 $25,000 $50,000 Less: Variable expenses 7,000 12,000 12,500 31,500 Contribution margin $ 3,000 $ 3,000 $12,500 $18,500 Less: Direct fixed expenses 4,000 5,000 3,000 12,000 Segment margin $ (1,000) $ (2,000) $ 9,500 $ 6,500 Less: Common fixed expenses 7,500 Operating income (loss) $(1,000) Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTime's vice president of marketing. 1. Jim believes that by increasing advertising by $1,000 ($250 for the scented line and $750 for the musical line), sales of those two lines would increase by 30%. Prepare segmented income statements based on Jim's assumptions. Note: Enter all amounts as positive numbers except subtotals, if applicable. Fun Time Segmented Income Statement Scented Musical Regular Total Sales 13,000 19,500 25,000 57,500 Less: Variable expenses 9,100 15,600 12,500 37,200 Contribution margin 3,900 3,900 12,500 20,300 Less: Direct fixed expenses 4,250 > 5,750 3,000 13,000 350 x $ Segment margin 1,850 X 9,500 7,300 > Less: Common fixed expenses 7,500 200 Operating income (loss) 2. Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Prepare an income statement for Fun Time assuming the Scented and Musical greeting card lines are dropped. Note: Enter all amounts as positive numbers except subtotals, if applicable. Fun Time Income Statement (Regular Greeting Cards only) Sales 20,000 Less: Variable expenses 10,000 Contribution margin 10,000 Less: Fixed expenses 10,500 Operating income (loss) 500 x Feedback Given this information, would it be profitable to eliminate the scented and musical lines? While dropping the two lines results in a loss of $ 500 it is worse than the alternative offered in Requirement 1. 3. Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial? ? Prepare segmented income statements assuming the Musical line is dropped and advertising is increased. Note: Enter all amounts as positive numbers except subtotals, if applicable. FunTime Segmented Income Statement Regular Total Scented 13,000 Sales 22.500 $ 35,500 Less: Variable expenses 9,100 11,250 20,350 Contribution margin 3,900 11,250 15,150 Less: Direct fixed expenses 4,250 3.000 7,250 $ Segment margin 350 X 8,250 7,900 Less: Common fixed expenses 7,500 400 Operating income (loss) Feedback Based on your calculations above, identify the best combination for the firm. Drop both scented and musical line