E7-7 Analyzing Keep-or-Drop Decision [LO 7-2, 7-5] MSI is considering eliminating a product from its Toddle Town 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 Toddle Town Tours collection follows: Segmented Income Statement for MSI's Toddle Town Tours Product Lines Sales revenue Variable costs Contribution margin Less: Direct Fixed costs Segment margin Less: Common fixed costs* Net operating income (loss) Pet Store Parade $90,000 39.000 $51,000 6,400 $44,600 9.000 $35,600 Grocery Getaway $85,000 35.000 $50,000 5,500 $44,500 8.500 $36,000 Post Office Polka Total $27,000 $202,000 22.000 96.000 $5,000 $106,000 4,500 16,400 $ 500 $ 89,600 2.700 20,200 $2,200) $ 69.400 *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. Effect on Profit 2. Should MSI drop the POP product? Yes 3-a. Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $2,000 of the common fixed costs could be avoided if the POP product line were eliminated. Effect on Profit Activate Windows Go to Settings to activate Windows. 3-b. Should MSI drop the POP product? Yes No Hints References eBook & Resources Hint #1 Check my work value: 2.00 points Required information E7-8 Analyzing Sell-or-Process-Further Decision [LO 7-2, 7-6] MSI's educational products are currently sold without any supplemental materials. The company is considering the inclusion of instructional materials such as an overhead slide presentation, potential test questions, and classroom bulletin board materials for teachers. A summary of the expected costs and revenues for MSI's two options follows: CD with Instructional CD Only 26,000 units $ 22.00 26,000 units 37.00 $ Estimated demand Estimated sales price Estimated cost per unit Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit manufacturing cost Additional development cost $ 2.25 3.50 3.50 3.00 $ 12.25 $ 2.75 6.50 6.75 3.00 $ 19.00 $105,000 Required: 1. Based on the given data, Compute the increase or decrease in profit that would result if instructional materials were added to the CDs. CD Only CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 2. Should MSI add the instructional materials or sell the CDs without them? O Sell the CDs without Instructional Materials Add the Instructional Materials 3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 19,000 units. Complete the table given below based on Requirement 1 and 2 data. CD Only CD with Instructions Materials Incremental Sales Revenue Variable Costs Contribution Margin Additional Development Costs Differential Profit (Loss) 3-b. Should MSI add the instructional materials or sell the CDs without them? Sell the CDs without Instructional Materials Add the Instructional Materials O
