Reference no: EM132514430

Norton Company makes three models of phasers.

                                  Shocker                  Stunner                  Paralyzer

Sales                           $360,000            $540,000                    $200,000

Variable expenses          160,000               200,000                     130,000

Contribution margin           200,000               340,000                  70,000

Fixed expenses              120,000                  225,000                  100,000

Net income                    $80,000                 $115,000                 ($30,000)

• Fixed expenses consist of $400,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $10,000 (Shocker), $30,000 (Stunner), and $5,000 (Paralyzer). 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. Rick Manley, an executive with the company, feels the Paralyzer line should be discontinued to increase the company's net income.

Instructions:

Question (a) Compute current net income for Norton Company.

Question (b) Compute net income by product line and in total for Norton Company if the company discontinues the Paralyzer product line. (Hint: Allocate the $400,000 common costs to the two remaining product lines based on their relative sales.)

Question (c) Should Norton eliminate the Paralyzer product line? Why or why not?