Dutson company manufactures running shoes and tennis shoes. the projected income statments for the two products are as follows:
Running Shoes Tennis shoes
Sale: $450,000 $750,000
Less: VC (270,000) (300,000)
CM $180,000 $450,000
Less: DFC (200,000) (220,000)
Segment Margin (20,000) $230,000
Less: Allocated FC (50,000) (75,000)
Net income loss (70,000) $155,000
The president of the company is considering dropping the running shoes. However, if the line is dropped, sale of tennis shoes will drop by 10%. There are no significant nonunit-level activity cost.
Required
A. should the company drop or keep the line of running shoes? Provide supporting computations.
B. assume that increasing the advertising budget by $20,000 will increase sales of running shoes by 5% and tennis shoes by 3%. Should advertising be increased?