Question

Blossom Company makes three models of tasers. Information on the three products is given below.

		Tingler		Shocker		Stunner
Sales		$304,000		$496,000		$200,000
Variable expenses		154,500		190,800		143,800
Contribution margin		149,500		305,200		56,200
Fixed expenses		120,200		228,900		94,400
Net income		$29,300		$76,300		$(38,200)

Fixed expenses consist of $300,000 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), $80,100 (Shocker), and $34,400 (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 Blossom Company.

Net income

$

(b)

Compute net income by product line and in total for Blossom Company if the company discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two remaining product lines based on their relative sales.)

Tingler Net Income		$
Shocker Net Income		$
Total Net Income		$

(c)

Should Blossom eliminate the Stunner product line?

YesNo

Why or why not?

Net income would decreaseincrease from $ to $ .

Answer 1

a
Net income	67400
b
Tingler Net Income	6500
Shocker Net Income	39100
Total Net Income	45600
c
NO, do not eliminate the Stunner product line
Net income would decrease from $67400 to $45600
Workings:
a
Tingler net income	29300
Shocker net income	76300
Stunner net income	-38200
Net income	67400
b
	Tingler	Shocker	Total
Sales	304000	496000	800000
Variable expenses	154500	190800	345300
Contribution margin	149500	305200	454700
Fixed expenses	143000	266100	409100
Net income	6500	39100	45600
Fixed expenses :
Tingler=29000+(300000/800000*304000) = $143000
Shocker=80100+(300000/800000*496000) = $266100