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	$ 10,000	$15,000	$25,000	$50,000
Less: Variable expenses	7,000	12,000	12,500	31,500
Contribution margin	$ 3,000	$ 3,000	$12,500	$18,500
Less: Direct fixed expenses	4,000	5,000	3,000	12,000
Segment margin	$ (1,000)	$ (2,000)	$ 9,500	$ 6,500
Less: Common fixed expenses				7,500
Operating income (loss)				$(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, FunTimes vice president of marketing.

Required:

Question Content Area

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

blank	Scented	Musical	Regular	Total	blank
Sales	$fill in the blank fbcfa0fadfb904f_1	$fill in the blank fbcfa0fadfb904f_2	$fill in the blank fbcfa0fadfb904f_3	$fill in the blank fbcfa0fadfb904f_4	blank
Less: Variable expenses	fill in the blank fbcfa0fadfb904f_5	fill in the blank fbcfa0fadfb904f_6	fill in the blank fbcfa0fadfb904f_7	fill in the blank fbcfa0fadfb904f_8	blank
Contribution margin	$fill in the blank fbcfa0fadfb904f_9	$fill in the blank fbcfa0fadfb904f_10	$fill in the blank fbcfa0fadfb904f_11	$fill in the blank fbcfa0fadfb904f_12	blank
Less: Direct fixed expenses	fill in the blank fbcfa0fadfb904f_13	fill in the blank fbcfa0fadfb904f_14	fill in the blank fbcfa0fadfb904f_15	fill in the blank fbcfa0fadfb904f_16	blank
Segment margin	$fill in the blank fbcfa0fadfb904f_17	$fill in the blank fbcfa0fadfb904f_18	$fill in the blank fbcfa0fadfb904f_19	$fill in the blank fbcfa0fadfb904f_20	blank
Less: Common fixed expenses	blank	blank	blank	fill in the blank fbcfa0fadfb904f_21	blank
Operating income (loss)	blank	blank	blank	$fill in the blank fbcfa0fadfb904f_22	blank

Question Content Area

If you were Kathy, how would you react to this information?

Kathy should

accept reject

this proposal. The 30% sales increase, coupled with the increased advertising,

reduces increases

the loss. Both scented and musical product-line profits increase. However, more must be done. If the scented and musical product margins remain negative, the two products may need to be dropped.

Question Content Area

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)

Sales	$fill in the blank e47c94fe5fb4073_1
Less: Variable expenses	fill in the blank e47c94fe5fb4073_2
Contribution margin	$fill in the blank e47c94fe5fb4073_3
Less: Fixed expenses	fill in the blank e47c94fe5fb4073_4
Operating income (loss)	$fill in the blank e47c94fe5fb4073_5

Question Content Area

Given this information, would it be profitable to eliminate the scented and musical lines?

While dropping the two lines results in

a lossincome

of $fill in the blank 78152afd3f86041_2 it is

worsebetter

than the alternative offered in Requirement 1.

Question Content Area

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

blank	Scented	Regular	Total
Sales	$fill in the blank a459effd306dfb3_1	$fill in the blank a459effd306dfb3_2	$fill in the blank a459effd306dfb3_3
Less: Variable expenses	fill in the blank a459effd306dfb3_4	fill in the blank a459effd306dfb3_5	fill in the blank a459effd306dfb3_6
Contribution margin	$fill in the blank a459effd306dfb3_7	$fill in the blank a459effd306dfb3_8	$fill in the blank a459effd306dfb3_9
Less: Direct fixed expenses	fill in the blank a459effd306dfb3_10	fill in the blank a459effd306dfb3_11	fill in the blank a459effd306dfb3_12
Segment margin	$fill in the blank a459effd306dfb3_13	$fill in the blank a459effd306dfb3_14	$fill in the blank a459effd306dfb3_15
Less: Common fixed expenses	blank	blank	fill in the blank a459effd306dfb3_16
Operating income (loss)	blank	blank	$fill in the blank a459effd306dfb3_17

Question Content Area

Based on your calculations above, identify the best combination for the firm.

Drop scented line and keep musical lineDrop musical line and keep scented lineDrop both scented and musical lineKeep both scented and musical line