Use incremental analysis for elimination of a product line. E20.16 (LO 6), AN Cawley Company makes...

Transcribed Image Text:

Use incremental analysis for elimination of a product line. E20.16 (LO 6), AN Cawley Company makes three models of tasers. Information on the three products is given here. Tingler Shocker Stunner Sales $300,000 $500,000 $200,000 Variable expenses 150,000 200,000 145,000 Contribution margin 150,000 300,000 55,000 Fixed expenses 120,000 230,000 95,000 Net income $ (40,000) $ 30,000 $ 70,000 Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $30,000 (Tingler), $80,000 (Shocker), and $35,000 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company's net income. Instructions a. Compute current net income for Cawley Company. b. Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.) c. Should Cawley eliminate the Stunner product line? Why or why not? Use incremental analysis for elimination of a product line. E20.16 (LO 6), AN Cawley Company makes three models of tasers. Information on the three products is given here. Tingler Shocker Stunner Sales $300,000 $500,000 $200,000 Variable expenses 150,000 200,000 145,000 Contribution margin 150,000 300,000 55,000 Fixed expenses 120,000 230,000 95,000 Net income $ (40,000) $ 30,000 $ 70,000 Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $30,000 (Tingler), $80,000 (Shocker), and $35,000 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company's net income. Instructions a. Compute current net income for Cawley Company. b. Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.) c. Should Cawley eliminate the Stunner product line? Why or why not?