Question

Toxemia Salsa Corporation manufactures five flavors of salsa. Last year, Toxemia generated net operating income of $40,000. The following information was taken from last year's income statement segmented by flavor (brackets indicate a negative amount): Contribution margin Segment margin Allocated common fixed expenses Segment margin less allocated common fixed expenses Wimpy $ (2,000) $(16,000) $ 10,000 Mild $ 45,000 $ (5,000) $10,000 Medium $35,000 $7,000 $10,000 Hot $50,000 $10,000 $10,000 Atomie $162,000 $ 94,000 $10,000 $(26,000) $(15,000) $ (3,000) $ 0 $ 84,000 Toxemia expects similar operating results for the upcoming year. If Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should Toxemia discontinue? Multiple Choice no favors should be discontinued Ooo o wmoy o women and more

Answer 1

Answer

• Correct Answer = Option #2: Wimpy flavour should be DISCONTINUED because:
  >Its Contribution margin is NEGATIVE, and
  >The Segment margin is NEGATIVE ore than the ‘Mild’s’ one.
• Negative Contribution margin suggests that variable costs of that flavour is MORE than the revenues that is it generating and there is no point of continuing with this Flavor WIMPY.