E7-7 Analyzing Keep-or-Drop Decision [LO 7-2, 7-5]

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. MSIs information related to the ToddleTown Tours collection follows:

Segmented Income Statement for MSIs
ToddleTown Tours Product Lines
	Pet Store Parade			Grocery Getaway			Post Office Polka				Total
Sales revenue	$	135,000		$	130,000		$	36,000			$	301,000
Variable costs		57,000			53,000			32,000				142,000
Contribution margin	$	78,000		$	77,000		$	4,000			$	159,000
Less: Direct Fixed costs		8,200			8,200			3,400				19,800
Segment margin	$	69,800		$	68,800		$	600			$	139,200
Less: Common fixed costs*		6,750			6,500			1,800				15,050
Net operating income (loss)	$	63,050		$	62,300		$	(1,200	)		$	124,150

*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. 2. Should MSI drop the POP product?

	Yes
	No

3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could be avoided if the POP product line were eliminated. 3-b. Should MSI drop the POP product?

	Yes
	No