Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal. Mohave’s information related to the Sand Trap line is shown below. Segmented Income Statement for Mohave’s Sand Trap Beach Umbrella Products Indigo Verde Azul Total Sales revenue $ 60,000 $ 60,000 $ 30,000 $ 150,000 Variable costs 34,000 31,000 26,000 91,000 Contribution margin $ 26,000 $ 29,000 $ 4,000 $ 59,000 Less: Direct fixed costs 1,900 2,500 2,000 6,400 Segment margin $ 24,100 $ 26,500 $ 2,000 $ 52,600 Common fixed costs* 17,840 17,840 8,920 44,600 Net operating income (loss) $ 6,260 $ 8,660 $ (6,920 ) $ 8,000 *Allocated based on total sales revenue Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products.Required:1-a. Complete the table given below, assuming Mohave Corp. drops the Azul line.1-b. Will Mohave’s net operating income increase or decrease if the Azul model is eliminated? By how much?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal.

Mohave’s information related to the Sand Trap line is shown below.

Segmented Income Statement for Mohave’s
Sand Trap Beach Umbrella Products
	Indigo		Verde		Azul		Total
Sales revenue	$	60,000		$	60,000	$	30,000		$	150,000
Variable costs		34,000			31,000		26,000			91,000
Contribution margin	$	26,000		$	29,000	$	4,000		$	59,000
Less: Direct fixed costs		1,900			2,500		2,000			6,400
Segment margin	$	24,100		$	26,500	$	2,000		$	52,600
Common fixed costs*		17,840			17,840		8,920			44,600
Net operating income (loss)	$	6,260		$	8,660	$	(6,920	)	$	8,000

*Allocated based on total sales revenue

Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products.

Required:
1-a. Complete the table given below, assuming Mohave Corp. drops the Azul line.
1-b. Will Mohave’s net operating income increase or decrease if the Azul model is eliminated? By how much?

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