MSI's information related to the ToddleTown Tours collection follows: Sales revenue Variable costs Contribution margin Less: Direct Fixed costs Segment margin Less: Common fixed costs* Net operating income (loss) Segmented Income Statement for MSI's Toddle Town Tours Product Lines Pet Store Parade $145,000 61,000 $ 84,000 8,600 $ 75,400 7,250 Grocery Getaway $ 140,000 57,000 $ 83,000 8,800 $ 74,200 7,000 $ 68,150 $ 67,200 Post Office Polka $ 38,000 34,000 $ 4,000 3,600 $ 400 1,900 $ (-1,500) Total $ 323,000 152,000 $ 171,000 21,000 $ 150,000 16,150 $ 133,850 *Allocated based on total sales revenue. MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products. Required: 1. Calculate the incremental effect on profit if the POP product is eliminated. 2. Should MSI drop the POP product? 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could be avoided if the POP product line were eliminated. 3-b. Should MSI drop the POP product?
MSI's information related to the ToddleTown Tours collection follows: Sales revenue Variable costs Contribution margin Less: Direct Fixed costs Segment margin Less: Common fixed costs* Net operating income (loss) Segmented Income Statement for MSI's Toddle Town Tours Product Lines Pet Store Parade $145,000 61,000 $ 84,000 8,600 $ 75,400 7,250 Grocery Getaway $ 140,000 57,000 $ 83,000 8,800 $ 74,200 7,000 $ 68,150 $ 67,200 Post Office Polka $ 38,000 34,000 $ 4,000 3,600 $ 400 1,900 $ (-1,500) Total $ 323,000 152,000 $ 171,000 21,000 $ 150,000 16,150 $ 133,850 *Allocated based on total sales revenue. MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products. Required: 1. Calculate the incremental effect on profit if the POP product is eliminated. 2. Should MSI drop the POP product? 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could be avoided if the POP product line were eliminated. 3-b. Should MSI drop the POP product?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
![Required information
E7-6 through E7-9.
[The following information applies to the questions displayed below.]
Morning Sky, Incorporated (MSI), manufactures and sells computer games. The company has several product lines based
on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD
format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has
developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products.
The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of
computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a
significant increase in sales to younger children. MSI has always included games for younger children but now wants to
expand its business to capitalize on changes in the industry. The company currently has excess capacity and is
investigating several possible ways to improve profitability.
E7-8 (Algo) Analyzing Keep-or-Drop Decision [LO 7-2, 7-5]
MSI is considering eliminating a product from its ToddleTown Tours collection. This collection is aimed at children one to three years of
age and includes "tours" of a hypothetical town. Two products, The Pet Store Parade and Grocery Getaway, have impressive sales.
However, sales for the third CD in the collection, Post Office Polka (POP), have lagged the others. Several other CDs are planned for
this collection, but none is ready for production.
MSI's information related to the ToddleTown Tours collection follows:
Sales revenue
Variable costs
Contribution margin
Less: Direct Fixed costs
Segment margin
Less: Common fixed costs*
Net operating income (loss)
Segmented Income Statement for MSI's
Toddle Town Tours Product Lines
Pet Store
Parade
$ 145,000
61,000
$ 84,000
8,600
$ 75,400
7,250
Grocery
Getaway
Post Office
Polka
$ 140,000
57,000
Total
$ 323,000
152,000
$ 83,000
8,800
$ 74,200
7,000
$ 38,000
34,000
$ 4,000
3,600
$ 400
1,900
$ 68,150
$ 67,200
$ (-1,500)
$ 171,000
21,000
$ 150,000
16,150
$ 133,850
*Allocated based on total sales revenue.
MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The
remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products.
Required:
1. Calculate the incremental effect on profit if the POP product is eliminated.
2. Should MSI drop the POP product?
3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could
be avoided if the POP product line were eliminated.
3-b. Should MSI drop the POP product?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa1887b4b-27b3-4788-9690-2c1bce536bf4%2F25875f4c-4527-4bdc-871b-8b96c868e05c%2F10ptcw_processed.png&w=3840&q=75)
Transcribed Image Text:Required information
E7-6 through E7-9.
[The following information applies to the questions displayed below.]
Morning Sky, Incorporated (MSI), manufactures and sells computer games. The company has several product lines based
on the age range of the target market. MSI sells both individual games as well as packaged sets. All games are in CD
format, and some utilize accessories such as steering wheels, electronic tablets, and hand controls. To date, MSI has
developed and manufactured all the CDs itself as well as the accessories and packaging for all of its products.
The gaming market has traditionally been targeted at teenagers and young adults; however, the increasing affordability of
computers and the incorporation of computer activities into junior high and elementary school curriculums has led to a
significant increase in sales to younger children. MSI has always included games for younger children but now wants to
expand its business to capitalize on changes in the industry. The company currently has excess capacity and is
investigating several possible ways to improve profitability.
E7-8 (Algo) Analyzing Keep-or-Drop Decision [LO 7-2, 7-5]
MSI is considering eliminating a product from its ToddleTown Tours collection. This collection is aimed at children one to three years of
age and includes "tours" of a hypothetical town. Two products, The Pet Store Parade and Grocery Getaway, have impressive sales.
However, sales for the third CD in the collection, Post Office Polka (POP), have lagged the others. Several other CDs are planned for
this collection, but none is ready for production.
MSI's information related to the ToddleTown Tours collection follows:
Sales revenue
Variable costs
Contribution margin
Less: Direct Fixed costs
Segment margin
Less: Common fixed costs*
Net operating income (loss)
Segmented Income Statement for MSI's
Toddle Town Tours Product Lines
Pet Store
Parade
$ 145,000
61,000
$ 84,000
8,600
$ 75,400
7,250
Grocery
Getaway
Post Office
Polka
$ 140,000
57,000
Total
$ 323,000
152,000
$ 83,000
8,800
$ 74,200
7,000
$ 38,000
34,000
$ 4,000
3,600
$ 400
1,900
$ 68,150
$ 67,200
$ (-1,500)
$ 171,000
21,000
$ 150,000
16,150
$ 133,850
*Allocated based on total sales revenue.
MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The
remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products.
Required:
1. Calculate the incremental effect on profit if the POP product is eliminated.
2. Should MSI drop the POP product?
3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could
be avoided if the POP product line were eliminated.
3-b. Should MSI drop the POP product?
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VIEWStep 2: Requirement 1- Determining incremental effect on profit if POP product is eliminated:
VIEWStep 3: Requirement 2- Analyzing whether the POP product should be dropped based on requirement 1:
VIEWStep 4: Requirement 3a- Calculation of incremental effect on profit if POP product is eliminated:
VIEWStep 5: Requirement 3b- Analyzing whether the POP product will be dropped based on requirement 3a:
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