Segmented Income Statement, Management Decision Making FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows: Scented Musical Regular Total Sales Less: Variable expenses Contribution margin Less: Direct fixed expenses Segment margin Less: Common fixed expenses Operating income (loss) $ 10,000 $15,000 $25,000 $50,000 7,000 12,000 12,500 31,500 $3,000 4,000 $3,000 $12,500 $18,500 5,000 3,000 12,000 $ (1,000) $ (2,000) $9,500 $6,500 7,500 $(1,000) Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTime's vice president of marketing. Required: 1. Jim believes that by increasing advertising by $1,000 ($250 for the scented line and $750 for the musical line), sales of those two lines would increase by 30%. Prepare segmented income statements based on Jim's assumptions. Note: Enter all amounts as positive numbers except subtotals, if applicable. FunTime Segmented Income Statement Sales FunTime Segmented Income Statement Line Item Description Scented Musical Regular Total Less: Variable expenses Contribution margin Less: Direct fixed expenses Segment margin Less: Common fixed expenses Operating income (loss) If you were Kathy, how would you react to this information? Kathy should this proposal. The 30% sales increase, coupled with the increased advertising, more must be done. If the scented and musical product margins remain negative, the two products may need to be dropped. the loss. Both scented and musical product-line profits increase. However, 2. Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Prepare an income statement for Fun Time assuming the Scented and Musical greeting card lines are dropped. Note: Enter all amounts as positive numbers except subtotals, if applicable. 2. Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Prepare an income statement for Fun Time assuming the Scented and Musical greeting card lines are dropped. Note: Enter all amounts as positive numbers except subtotals, if applicable. FunTime Income Statement (Regular Greeting Cards only) Line Item Description Amount Sales Less: Variable expenses Contribution margin Less: Fixed expenses Operating income (loss) Given this information, would it be profitable to eliminate the scented and musical lines? While dropping the two lines results in a loss of $ it is worse than the alternative offered in Requirement 1. 3. Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial? Prepare segmented income statements assuming the Musical line is dropped and advertising is increased. Note: Enter all amounts as positive numbers except subtotals, if applicable. 3. Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial? Prepare segmented income statements assuming the Musical line is dropped and advertising is increased. Note: Enter all amounts as positive numbers except subtotals, if applicable. FunTime Segmented Income Statement Line Item Description Scented Regular Total Sales Less: Variable expenses Contribution margin Less: Direct fixed expenses Segment margin Less: Common fixed expenses Operating income (loss) Based on your calculations above, identify the best combination for the firm.