- Shatner Company makes three models of phasers. Information on the three products is given below.
- Stunner Double-Set Mega-Power
- Sales $300,000 $500,000 $200,000
- Variable expenses 150,000 200,000 140,000
- Contribution margin 150,000 300,000 60,000
- Fixed expenses 120,000 225,000 90,000
- Net income $30,000 $75,000 $(30,000)
Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,000 (Double-Set), and $30,000 (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.
Jim Kirk, an executive with the company, feels the Mega-Power line should be discontinued to increase the company's net income.
Instructions
Compute current net income for Shatner Company.
$Compute net income by product line and in total for Shatner Company if the company discontinues the Mega-Power product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)
Stunner net income
$Double-set net income
$Total net income
$Should Shatner eliminate the Mega-Power product line?