Nimoy Company makes three models of phasers. Information on the three products is given below. ...

Question:

Nimoy Company makes three models of phasers. Information on the three products is given below.

Stunner Double-Set Mega-Power
Sales $299,450 $499,090 $199,640
Variable expenses 142,390 200,940 139,390
Contribution margin 157,060 298,150 60,250
Fixed expenses 121,680 228,066 91,378
Net income $35,380 $70,084 $(31,128)

Fixed expenses consist of $307,400 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $29,461 (Stunner), $74,366 (Double-Set), and $29,897 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is phased out.

Mr. Spock, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.

Instructions:

(a) Compute current net income for Nimoy Company.

(b) Compute net income by product line and in total for Nimoy Company if the company discontinues the Mega-Power product line.

Discontinuing a Product-Line:

In order to calculate the financial effect that discontinuing a product will have, only the avoidable costs should be used. Common, allocated overhead costs are often not avoidable so it should be ignored.

Answer and Explanation:


a.) The current net income is:

Stunner Double-Set Mega-Power Total
Sales $299,450 $499,090 $199,640 $998,180
Variable expenses 142,390 200,940 139,390 482,720
Contribution margin 157,060 298,150 60,250 $515,460
Fixed expenses 121,680 228,066 91,378 441,124
Net income $35,380 $70,084 $(31,128) $74,336


b.) The net income will be:

Stunner Double-Set Mega-Power Total
Sales $299,450 $499,090 $0 $798,540
Variable expenses 142,390 200,940 0 343,330
Contribution margin $157,060 $298,150 0 $455,210
Fixed expenses - Direct 29,461 74,366 0 103,827
Product Margin $127,599 $223,784 0 $351,383
Common fixed expenses 307,400
Net income $43,983

Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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