Question

Cawley Company makes three models of tasers. Information on the three products is given below.Tingler Shocker Stunner Sales $296,000 $504,000 $200,000 Variable expenses 145,000 190,000 135,000 Contribution margin 151,000 314,000 65,000 Fixed expenses 114,840 225,160 92,000 Net income $36,160 $88,840 $(27,000) Fixed expenses consist of $290,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $29,000 (Tingler), $79,000 (Shocker), and $34,000 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out.James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company’s net income.

(a) Compute current net income for Cawley Company. Net income $ ______
(b) Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $290,000 common costs to the two remaining product lines based on their relative sales.)
Tingler Net Income $ _______
Shocker Net Income $ _______
Total Net Income $ _______
(c) Should Cawley eliminate the Stunner product line?
Why or why not?

Net income would _____ from $ ______to $ ________.

Answer 1

Answer:

Cawley Company

a) Current Net Income

                                        Tingler            Shocker      Stunner     Total

Sales                            $296,000     $504,000   $200,000  $1,000,000

Variable Costs               145,000         190,000      135,000        470,000

Contribution                   151,000         314,000        65,000        530,000

Fixed Expenses              114,840         225,160        92,000       432,000

Net Income                      36,160          88,840        (27,000)       98,000

b) Net Income by product line with Stunner discontinued:

                                                Tingler       Shocker           Total

Sales                                  $296,000       $504,000        $800,000

Variable Costs                      145,000          190,000          335,000

Contribution                          151,000          314,000           465,000

Fixed Expenses                    136,300          261,700           398,000        

Net Income                             14,700          52,300             67,000

c1) Cawley should not eliminate the Stunner product line.

c2) Net income would decrease from $98,000 to $67,000 if the Stunner product line is eliminated.

Explanation:

a) The decision to be made is whether to eliminate a product line or not.  In making such decisions, the relevant costs to be considered are avoidable costs.  Allocated fixed costs are unavoidable and should not be taken into account.

b) Stunner makes a Net Income of $31,000 without the allocated common fixed expenses.  This shows that the allocated common fixed expenses is actually causing Stunner to record Net Loss.  And when Stunner is eliminated the company is not better off.

c) Allocation of Fixed Expenses based on Sales:

Tingler = 296/800 * $290,000 = $107,300 Plus direct cost of $29,000 = $136,300

Shocker = 504/800 * $290,000 = $182,700 Plus direct of of $79,000 = $261,700