Ivanhoe Company makes three models of tasers. Information on the three products is given below. Tingler Shocker Stunner Sales $296,000 $504,000 $200,000 Variable expenses 151,100 203,300 138,600 Contribution margin 144,900 300,700 61,400 Fixed expenses 116,616 228,184 93,900 Net income $28,284 $72,516 $(32,500) Fixed expenses consist of $296,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $29,000 (Tingler), $79,000 (Shocker), and $34,700 (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. (a) Compute current net income for Ivanhoe Company. Net income $ (b) Compute net income by product line and in total for Ivanhoe Company if the company discontinues the Stunner product line. (Hint: Allocate the $296,000 common costs to the two remaining product lines based on their relative sales.) Tingler Net Income $ Shocker Net Income $ Total Net Income $ (c) Should Ivanhoe eliminate the Stunner product line? Yes/No Net income would increase/decrease from $ to $

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Ivanhoe Company makes three models of tasers. Information on the three products is given below.

	Tingler	Shocker	Stunner
Sales	$296,000	$504,000	$200,000
Variable expenses	151,100	203,300	138,600
Contribution margin	144,900	300,700	61,400
Fixed expenses	116,616	228,184	93,900
Net income	$28,284	$72,516	$(32,500)

Fixed expenses consist of $296,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $29,000 (Tingler), $79,000 (Shocker), and $34,700 (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.

(a)

Compute current net income for Ivanhoe Company.

Net income

(b)

Compute net income by product line and in total for Ivanhoe Company if the company discontinues the Stunner product line. (Hint: Allocate the $296,000 common costs to the two remaining product lines based on their relative sales.)

Tingler Net Income		$
Shocker Net Income		$
Total Net Income		$

(c)

Should Ivanhoe eliminate the Stunner product line?

Yes/No

Net income would increase/decrease from $ to $ .

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