E7-8 (Algo) 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	$	120,000		$	115,000		$	33,000			$	268,000
Variable costs		51,000			47,000			29,000				127,000
Contribution margin	$	69,000		$	68,000		$	4,000			$	141,000
Less: Direct Fixed costs		7,600			7,300			3,100				18,000
Segment margin	$	61,400		$	60,700		$	900			$	123,000
Less: Common fixed costs*		6,000			5,750			1,650				13,400
Net operating income (loss)	$	55,400		$	54,950		$	(750	)		$	109,600

*Allocated based on 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. Calculate the incremental effect on profit if the POP product is eliminated.

2. Should MSI drop the POP product?

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?

E7-9 (Algo) Analyzing Sell-or-Process-Further Decision [LO 7-2, 7-6]

MSIs 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 MSIs two options follows:

	CD Only				CD with Instructional Materials
Estimated demand			39,000	units			39,000	units
Estimated sales price		$	35.00			$	50.00
Estimated cost per unit
Direct materials		$	6.75			$	9.25
Direct labor			9.00				13.00
Variable manufacturing overhead			9.00				12.25
Fixed manufacturing overhead			9.50				9.50
Unit manufacturing cost		$	34.25			$	44.00
Additional development cost						$	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.

2. Should MSI add the instructional materials or sell the CDs without them?

3-a. Suppose that the higher price of the CDs with instructional materials is expected to reduce demand to 21,000 units. Complete the table given below based on Requirement 1 and 2 data.

3-b. Should MSI add the instructional materials or sell the CDs without them?