E7-16 Nichols Company makes three models of phasers. Information on the three prod- Use incremental analysis for ucts is given below. elimination of a product line. (S0 7) Stunner Double-Set Mega-Power Sales $300,000 $500,000 $200,000 Variable expenses 150,000 200,000 140,000 Contribution margin 150,000 300,000 60,000 Fixed expenses 120,000 225,000 90,000 Net income $ 30,000 $ 75,000 $ (30,000) Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,000 (Double- Set), and $30,000 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is phased out. Ralph Port, an executive with the company, feels the Mega-Power line should be dis- continued to increase the company's net income. Instructions (a) Compute current net income for Nichols Company. (b) Compute net income by product line and in total for Nichols Company if the com- pany discontinues the Mega-Power product line. (Hint: Allocate the $300,000 com- mon costs to the two remaining product lines based on their relative sales.) (c) Should Nichols eliminate the Mega-Power product line? Why or why not