Question
FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows: Scented Musical Regular
FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows:
Scented | Musical | Regular | Total | |
Sales | $ 10,000 | $15,000 | $25,000 | $50,000 |
Less: Variable expenses | 7,000 | 12,000 | 12,500 | 31,500 |
Contribution margin | $ 3,000 | $ 3,000 | $12,500 | $18,500 |
Less: Direct fixed expenses | 4,000 | 5,000 | 3,000 | 12,000 |
Segment margin | $ (1,000) | $ (2,000) | $ 9,500 | $ 6,500 |
Less: Common fixed expenses | 7,500 | |||
Operating income (loss) | $(1,000) |
Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTimes vice president of marketing.
2. Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%.
Prepare an income statement for Fun Time assuming the Scented and Musical greeting card lines are dropped.
Note: Enter all amounts as positive numbers except subtotals, if applicable.
FunTime | |
Income Statement | |
(Regular Greeting Cards only) | |
Sales | $20,000 |
Less: Variable expenses | 10,000 |
Contribution margin | $10,000 |
Less: Fixed expenses | ? |
Operating income (loss) | $ ? |
3. Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial?
Prepare segmented income statements assuming the Musical line is dropped and advertising is increased.
Note: Enter all amounts as positive numbers except subtotals, if applicable.
FunTime | |||
Segmented Income Statement | |||
Scented | Regular | Total | |
Sales | $13,000 | $22,500 | $35,500 |
Less: Variable expenses | 9100 | 11250 | 20350 |
Contribution margin | 3900 | 11250 | 15150 |
Less: Direct fixed expenses | ? | 3000 | ? |
Segment margin | ? | 8250 | ? |
Less: Common fixed expenses | 7500 | ||
Operating income (loss) | ? |
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