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Question - Sandhill Toys' management is considering eliminating product A, which has been showing a loss for several years. The company's annual income statement, is as follows:
A
B
C
Total
Sales
$2,221,000
$1,402,000
$1,819,600
$5,442,600
Variable expenses
1,668,000
601,300
1,083,800
3,353,100
Contribution margin
$553,000
$800,700
$735,800
$2,089,500
Advertising expense
$514,000
$427,000
$522,000
$1,463,000
Depreciation expense
15,300
10,600
20,100
46,000
Corporate expenses
94,700
84,400
105,900
285,000
Total fixed expenses
$624,000
$648,000
$1,794,000
Operating income
$(71,000)
$278,700
$87,800
$295,500
Advertising expense - Specific to each product.
Depreciation expense - Specific to each product; no other use available, no resale value.
Corporate expenses - Allocated based on number of employees.
Required -
(a) Restate the income statement in segment margin format.
(b) What would be the effect on income if product A were dropped?
(c) Management is considering making a new product using product A's equipment. If the new product's selling price per unit were $10, its variable costs were $5, and its advertising costs were the same as for product A, how many units of the new product would the company have to sell to make the switch from product A to the new product worthwhile?
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