MSI is consideringeliminating a product from its ToddleTown Tours collection. Thiscollection is aimed at children one to three years of age andincludes “tours” of a hypothetical town. Two products, The PetStore Parade and The Grocery Getaway, have impressive sales.However, sales for the third CD in the collection, The Post OfficePolka, have lagged the others. Several other CDs are planned forthis collection, but none is ready for production.
MSI’s information related to the ToddleTown Tours collectionfollows:
| Segmented Income Statement for MSI’s |
| ToddleTown Tours Product Lines |
| Pet Store Parade | | Grocery Getaway | | Post Office Polka | | | Total |
| Salesrevenue | $ | 55,000 | | $ | 50,000 | | $ | 20,000 | | | $ | 125,000 |
| Variablecosts | | 25,000 | | | 21,000 | | | 15,000 | | | | 61,000 |
| Contributionmargin | $ | 30,000 | | $ | 29,000 | | $ | 5,000 | | | $ | 64,000 |
| Less: DirectFixed costs | | 5,000 | | | 3,400 | | | 4,000 | | | | 12,400 |
| Segmentmargin | $ | 25,000 | | $ | 25,600 | | $ | 1,000 | | | $ | 51,600 |
| Less: Commonfixed costs* | | 14,080 | | | 12,800 | | | 5,120 | | | | 32,000 |
| Net operatingincome (loss) | $ | 10,920 | | $ | 12,800 | | $ | (4,120 | ) | | $ | 19,600 |
|
*Allocated based on total sales dollars.
MSI has determined that elimination of the Post Office Polka (POP)program would not impact sales of the other two items. Theremaining fixed overhead currently allocated to the POP productwould be redistributed to the remaining two products.
Required:
1. Calculate the incremental effect on profit if the POPproduct is eliminated.
2. Should MSI drop the POP product?
3-a. Calculate the incremental effect on profit ifthe POP product is eliminated. Suppose that $4,000 of the commonfixed costs could be avoided if the POP product line wereeliminated.
3-b. Should MSI drop the POP product?
