Exercise 7-16 (Video)

Cawley Company makes three models of tasers. Information on the three products is given below.

TinglerShockerStunner

Sales$300,000$500,000$200,000

Variable expenses150,000200,000145,000

Contribution margin150,000300,00055,000

Fixed expenses120,000230,00095,000

Net income$30,000$70,000$(40,000)

Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $30,000 (Tingler), $80,000 (Shocker), and $35,000 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the companys net income. (a) Compute current net income for Cawley Company.

Net income$

(b) Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)

Tingler Net Income$

Shocker Net Income$

Total Net Income$

(c) Should Cawley eliminate the Stunner product line?

YesNo

Why or why not? Net income would

increasedecrease

from $ to $.