PA7-3 Analyzing Keep-or-Drop Decision [LO 7-2, 7-5] 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. Mohaves information related to the Sand Trap line is shown below. Segmented Income Statement for Mohaves 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 1,900 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 $ (6,920 ) $ 8,000 *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.

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 Verde Azul $60,000 $60,000 S30,000 S150,000 31.000 26.000 $26,000 $29,000 4,000 59,000 Indi ota Sales revenue Variable costs 34.000 3 Contribution ma Segment margin Net operating income (loss) rgin 1,900 Less: Direct Fixed costs $24,100 S26,500 2,000 S 52,600 17,840 17,840 8,920 44,600 6.920 Common fixed costs 6260 86605 (6 920 5 8000 6.260 8,000 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 Verde Total Sales Revenue Variable Costs Contribution Margin Direct Fixed Costs Segment Margin Common Fixed Costs Net operating income l) -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 ncrease 2. Should Mohave drop the Azul model? No O Yes 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 Contribution Margin Gained on Indigo Contribution Margin Gained on Verde Contribution Margin Lost on Azl Net Increase in Contribution Margin Change in Fixed Costs Net Change in Profit if Azul is Eliminated 3-b. Should it the drop Azul model? O No Yes 3-c. What is the increase or decrease in the net operating income of Mohave? Change in Net Operating Income (Loss) by Increase