Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal. Mohave's information related to the Sand Trap line is shown below. Segmented Income Statement for Mohave's Sand Trap Beach Umbrella Products Indigo Verde Azul Total Sales revenue $60,000 $60,000 $30,000 $150,000 Variable costs 34,000 31,000 26,000 91,000 Contribution margin $26,000 $29,000 $ 4,000 $ 59,000 Less: Direct Fixed costs 2.500 2,000 6,400 Segment margin $24,100 $26.500 $ 2,000 $ 52,600 Common fixed costs* 17.840 17,840 8.920 44.600 Net operating income (loss) $ 6,260 $ 8,660 S (6,920 8.000 1,900 *Allocated based on total sales revenue Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products. Required: 1-a. Complete the table given below, if Mohave Corp drops the Azul line. (Do not round intermediate calculations. Round Common Fixed Costs to the nearest whole dollar.) Indigo 66,000 $ Sales Revenue $ Variable Costs 37,400 Verde Total 69,000 $ 135,000 35,650 73,050 33,350 61,950 2,500 4,400 30,850 57,550 28,600 1,900 Contribution Margin Direct Fixed Costs Segment Margin Common Fixed Costs Net operating income 26,700 44,600 $ 12,950 (loss) 1-b. Will Mohave's net operating income increase or decrease if the Azul model is eliminated? By how much? Change in Net Operating Income (Loss) by $ 4,950 Increase 2. Should Mohave drop the Azul model? O Yes O No 3-a. Complete the table given below assuming that Mohave had no direct fixed overhead in its production information and the entire $51,000 of fixed cost was common fixed cost. Change in Contribution Margin 21,600 $ 41,350 4,000 Contribution Margin Gained on Indigo Contribution Margin Gained on Verde Contribution Margin Lost on Azul Net Increase in Contribution Margin Change in Fixed Costs Net Change in Profit if Azul is Eliminated 21,950 $ 21,950 3-b. Should it the drop Azul model? Yes No 3-C. What is the increase or decrease in the net operating income of Mohave? Change in Net Operating Income (Loss) by $ 2,950 Decrease
