E7-7 Analyzing Keep-or-Drop Decision 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 ToddleTown Tours Product Lines Store Grocery Post Office Total Parade $50,000 23,000 $27,000 4,800 $22,200 14.400 7,800 Getawa $45,000 19.000 $26,000 3,100 $22,900 12960 9.940 Polka 15,000 10,000 5,000 3,500 1500 4.320 $ (2,820) Sales revenue Variable costs $110,000 52,000 58,000 Contribution margin Segment margin Net operating income (loss) Less: Direct fixed costs 11.400 S 46,600 31,680 S 14,920 Less: Common fixed costs *Allocated based 0 total sales revenue. 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. Will MSI's net operating income increase or decrease if the POP product is eliminated? By how much? 2. Should MSI drop the POP product? 3. Suppose that $3,700 of the common fixed costs could be avoided if the POP product line were eliminated. Would your recommendation to MSI change? Why or why not