Incremental Analysis

Safe and Secure, Inc. produces three models of home security systems. Information on the three products for 2017 is given below:

Assurance Decoder Burglar Beware

Sales $450,000 $750,000 $300,000

Variable expenses 225,000 300,000 217,500

Contribution margin 225,000 450,000 82,500

Fixed expenses 180,000 345,000 142,500

Net income $ 45,000 $105,000 $(60,000)

Units Sold 3,750 2,000 1,500

Fixed expenses consist of $450,000 of common costs allocated to the three products based on relative sales, and additional fixed costs of $45,000 (Assurance), $120,000 (Decoder), and $52,500 (Burglar Beware). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is phased out.

Matt Dillon, an executive with the company with extensive law enforcement background, feels that the Burglar Beware line should be discontinued to increase the companys net income.

Instructions

(a) Compute current net income for Safe and Secure, Inc.

(b) Compute net income by product line and in total for Safe and Secure, Inc., if the company discontinues the Burglar Beware product line.

(c) Should Safe and Secure, Inc., eliminate the Burglar Beware product line? Prepare an incremental analysis showing why or why not?

(d) Sapphire Security, a Chinese reseller, believes the Burglar Beware has the perfect features for their domestic market and offers to buy 1,000 units at $170/unit. Prepare an incremental analysis comparing this option to the option you chose from item (c), what should Safe and Secure do?