MSI is considering eliminating a product from its ToddleTown Tours collection. This collection is aimed at children one to three years of age and includes tours of a hypothetical town. Two products, The Pet Store Parade and The Grocery Getaway, have impressive sales. However, sales for the third CD in the collection, The Post Office Polka, have lagged the others. Several other CDs are planned for this collection, but none is ready for production.

MSI has determined that elimination of the Post Office Polka (POP) program would not impact sales of the other two items. The remaining fixed overhead currently allocated to the POP product would be redistributed to the remaining two products.

1) Calculate the incremental effect on profit if the POP product is eliminated.

2) Should MSI drop the POP product?

3a) Calculate the incremental effect on profit if the POP product is eliminated. Suppose that $1,200 of the common fixed costs could be avoided if the POP product line were eliminated.

3b) Should MSI drop the POP product?

Segmented Income Statement for MSI's Toddle Town Tours Product Lines Post Pet Store Grocery Office Parade Getaway Polka Total 125,000 120,000 25,000s 120,000 s34,000 s 279,000 Sales revenue $34,000 $279,000 53,000 49,000 30,000 132,000 72,000 71,000 4,000 $147,000 Variable costs Contribution margin Less: Direct Fixed costs 7,800 7,600 3,200 18,600 Segment margin 64,200 63,400 $ 800$ 128,400 Less: Common fixed costs* 6,250 6,000 1,700 13,950 Net operating income (loss) $ 57,950 57,400 (900) $ 114,450