Woodchuck Corp. is considering eliminating a product from its line of outdoor tables. Two products, the Oak-A and Fiesta tables, have impressive sales. However, sales for the Studio model have been dismal.

Information related to Woodchuck’s outdoor table line follows:

Woodchuck has determined that eliminating the Studio model will cause sales of the Oak-A and Fiesta tables to increase by 20 percent and 5 percent, respectively. Variable costs for these two models will increase proportionately. Direct fixed costs are avoidable, but common fixed costs will remain unchanged.

Required;

1. Determine what would happen to the company’s total profit if Woodchuck were to drop the Studio product. What is your recommendation to Woodchuck?

2. Suppose Woodchuck had \($1,800\) of direct fixed overhead that was traceable to the Studio model. Would your recommendation to Woodchuck change? Why or why not?

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Segmented Income Statement for Woodchuck's Outdoor Table Products Oak-A Fiesta Studio Total Sales Revenue $110,000 $77,000 $33,000 $220,000 Variable Costs 77,000 52,000 24,000 153,000 Contribution Margin $ 33,000 $25,000 9,000 Less: Direct Fixed Costs 3,200 2,400 800 Segment Margin $ 29,800 $22,600 $ 8,200 Common Fixed Costs* 16,800 11,760 5,040 Profit $ 13,000 $10,840 $ 3,160 $ 67,000 $ 60,600 $ 27,000 6,400 33,600 *Allocated based on total sales dollars.