Azul Total Variable costs 34,000 LOSS Direct fixed costs 1,900 2,500 Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal. Mohave's Information related to the Sand Trap line is shown below. Segmented Income Statement for Mohave's Sand Trap Beach Umbrella Products Indigo Verde Sales revenue $60,000 $60,000 $30,000 $150,000 31,000 26,000 91,000 Contribution margin $26,000 $29,000 $ 4,000 $ 59,000 2,000 6,400 Segment margin $24,100 $26.500 $ 2,000 $ 52,600 Common fixed costo. 17,840 17.840 8,920 44,600 Net operating income (106) $ 6,260 $ 8,660 $16,920) $8.000 "Allocated based on total sales revenue Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products Required: 1-a. Complete the table given below, assuming Mohave Corp, drops the Azul line 1-b. Will Mohave's net operating Income increase or decrease if the Azul model is eliminated? By how much? 2. Should Mohave drop the Azul model? 3-a. Complete the table given below assuming that Mohave had no direct fixed overhead in its production Information and the entire $51,000 of fixed cost was common fixed cost. 3-b. Should Mohave drop the Azul model? 3.c. What is the increase or decrease in the net operating income of Mohave? Req 1A Req 1B Reg 2 Req Req 3B Reg 3C Complete the table given below, assuming Mohave Corp. drops the Azul line. (Do not round inter Common Fixed Costs to the nearest whole dollar.) Sales Revenue Variable Costs Contribution Margin Direct Fixed Costs Segment Margin Common Fixed Costs Net Operating Income (Loss) Indigo $ 66,000 $ 37,400 28,600 (1,900) 26,700 21,804 $ 4,896 $ Verde Total 69,000 $ 135,000 35,650 73,050 33,350 61,950 (2,500) (4,400) 30,850 57,550 22,796 44,600 8,054 $ 12,950 K Reg 1A Reg 1B > Reg 1A Req 1B Req 2 Req Req 3B Req 30 Complete the table given below assuming that Mohave had no direct fixed overhead in its entire $51,000 of fixed cost was common fixed cost. Contribution Margin Gained on Indigo Contribution Margin Gained on Verde Contribution Margin Lost on Azul Net Increase in Contribution Margin Change in Fixed Costs Net Change in Profit if Azul is Eliminated Change in Contribution Margin $ 2,600 4,350 (4,000) 2,950 Req 1A Reg 1B Reg 2 Req Req 3B Req 30 Will Mohave's net operating income increase or decrease if the Azul model is eliminated? By h Change in Net Operating Income (Loss) $ 4,950 Increase
