4 Morning Sky, Inc. (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. 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 ToddleTown Tours collection follows: Segmented Income Statement for MSI's ToddleTown Tours Product Lines Sales revenue Variable costs Contribution margin Less: Direct Fixed costs. Segment margin Less: Common fixed costs Net operating income (loss) Getaway $105,000 3,000 Pet Store Grocery Post office Parade $110,000 Polka $31,000 28,000 $ 3,000 Total $246,000 118,000 $128,000 2,800 16,700 $ 200 $111,300 550 12,300 47,000 $ 63,000 7,200 $55,800 5,500 $ 50,300 $ 62,000 6,700 $55,300 5,250 5.50,050 $(1,350) $ 99,000 "Allocated based on total sales revenue.