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 yea of age and includes "tours" of a hypothetical town. Two products, The Pet Store Parade and The Grocery Getaway, have impressi sales. However, sales for the third CD in the collection. The Post oice 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 ost Pet Store Grocery Office Parade Getaway PolkaTotal $105,000$100,000 $30,000 $235,000 45,00041,000 25,000 111,000 S 60.,000 $59,000 $ 5,000 $124,000 4.80018.200 S 53,000 52,600 200 $105,800 5,0001,50011,750 Sales revenue Variable costs Contribution margin Segment margin Net operating income (loss) Less: Direct Fixed costs 6.400 Less: Common fixed costs 5.250 4760- $(1,300) s 9405- 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 currenty 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 $ 850 Decrease Th MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. remaining fixed overhead currentiy 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 850 Decrease 2. Should MSI drop the POP product? O Yes No 3-3. Calculate the incremental effect on proft fthe POP product is eliminated Suppose that $1,000 of the common fixed costs c be avoided if the POP product line were eliminated. se that $1.000 of the common fixed costs c Effect on Profit $1,300 3-b. Should MSI drop the POP product? Yes O No
