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 The Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, The Post Office Polka, have lagged the others. Several other CDs are planned for this collection, but none is ready for production.
MSI's information related to the Toddle Town Tours collection follows: Segmented Income Statement for MSI's Toddle Town Tours Product Lines Post Office Parade Getaway _Polka Pet Store Grocery Total Sales revenue Variable costs $110,000 $105,000 $31,000 $246,000 43,000 28,000 118,000 $ 63,000 S 62,000 $ 3,000 $128,000 2,800 16,700 $ 55,800 S 55,300 $ 200 $ 111,300 1,550 12,300 47,000 1000 4 Contribution margin Segment margin Net operating income (loss) Less: Direct Fixed costs 7,200 006,700 Less: Common fixed costs .505350 99,000 50,300 $ 50,050S (1.350) S 5,500 0 $ 50,050 $ (1,350) $99,000 5,250 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. 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 Effect on Profit 2. Should MSI drop the POP product?

Answer:

MSI

1. Incremental effect on profit if the POP product is eliminated is:

Profit will be reduced by $200 ($99,000 - $98,800).

2. Yes. MSI should drop the POP product.  POP product is like a dog in the BCG matrix.

Explanation:

a) Data and Calculations:

Segmented Income Statement

for MSI's Toddle Town Tours Product Lines

                                              Pet Store     Grocery      Post Office      Total

                                               Parade      Getaway           Polka           Firm

Total Sales revenue                $110,000      $105,000   $31,000   $246,000

Variable costs                             47,000         43,000     28,000        118,000  

Contribution margin               $ 63,000     $ 62,000    $ 3,000     $128,000

Less: Direct Fixed costs              7,200           6,700        2,800          16,700

Segment margin                    $ 55,800     $ 55,300        $ 200      $ 111,300

Less: Common fixed costs         5,500          5,250         1,550          12,300

Net operating income (loss)  $50,300    $ 50,050     $ (1,350)      $99,000

Segmented Income Statement after POP Elimination

for MSI's Toddle Town Tours Product Lines

                                                  Pet Store     Grocery            Total

                                                    Parade      Getaway            Firm

Total Sales revenue                $110,000      $105,000       $215,000

Variable costs                             47,000         43,000           90,000  

Contribution margin               $ 63,000     $ 62,000        $125,000

Less: Direct Fixed costs              7,200           6,700             13,900

Segment margin                    $ 55,800     $ 55,300          $ 111,100

Less: Common fixed costs         6,275           6,025             12,300

Net operating income (loss) $ 49,525      $ 49,275         $98,800

1. Incremental effect on profit if the POP product is eliminated is:

Profit will be reduced by $200 ($99,000 - $98,800), which is the difference between the allocated fixed cost to POP ($1,550) and its operating loss ($1,350).

2. Yes. MSI should drop the POP product.  POP product is like a dog in the BCG matrix.

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