Instructions

(a) Compute current net income for Cawley Company.

(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.)

(c) Should Cawley eliminate the Stunner product line? Why or why not?

Make incremental analysis concerning keeping or dropping a product to maximize operating income.

E20-16 Cawley Company makes three models of tasers. Information on the three products is given below. Tinglg Shocker Stunner Sales $300,000 $500,000 $200,000 Variable expenses _150,000 200,000 _145,000 Contribution margin 150,000 300,000 55,000 Fixed expenses 120,000 _23Q,000 _9_5,000 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, and additional xed expenses 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 other xed expenses would be eliminated if a model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company's net income