Question

Clarington Company makes three models of phasers. Information on the three products is given below:

		Stunner		Double-Set			Mega-Power
Sales		$301,000		$451,500				$188,125
Variable expenses		150,000		203,500				145,000
Contribution margin		151,000		248,000				43,125
Fixed expenses		119,500		211,400				86,300
Net income		$31,500		$36,600				($43,175	)

Fixed expenses consist of $282,000 of common costs allocated to the three products based on relative sales, and additional fixed expenses of $29,400 (Stunner), $75,900 (Double-Set), and $29,900 (Mega-Power). The common costs will be incurred regardless of how many models are produced. The other fixed expenses would be eliminated if a model is discontinued.

John Liu, an executive with the company, feels the Mega-Power line should be discontinued to increase the company’s net income.

Calculate current net income for Clarington Company.

Current net income

$

Calculate net income by product line and in total for Clarington Company if the company discontinues the Mega-Power product line. (Hint: Allocate the $282,000 common costs to the two remaining product lines based on their relative sales.)

		Stunner	Double-Set	Total
Net income		$	$	$

Should Clarington eliminate the Mega-Power product line? Why or why not?

Clarington                                                                       should notshould eliminate the Mega-Power product line. Elimination of the line would cause net income to                                                                       risedrop.

Answer 1

Answer:-

a)

Particulars	Amount
Stunner	$31,500
Double-Set	$36,600
Mega-Power	($43,175)
Current net income	$24,925

b)

Stunner Double-Set Total Net income $8,800 $2900 $11,700

Notes:

Calculation of net income if cawley discontinued
	Stunner	Double-Set	Total
Contribution Margin	$151,000	$248,000	$399,000
Less: Fixed Cost
Specific Cost	$29,400	$75,900	$105,300
Common fixed cost	$112,800	$169,200	$282,000
Net Income	$8,800	$2,900	$11,700

Allocation of common fixed cost
	Stunner	Double-Set	Total
Sales	$301,000	$451,500	$752,500
Allocated fixed cost	$112,800	$169,200	$282,000
	($282,000 *($301,000/$752,500))	($282,000 *($451,500/$752,500))

C) No, stunner product line should not be eliminated because it will result in decrease in income of $$24,925 to $11,700

I HOPE IT USEFUL TO YOU IF YOU HAVE ANY DOUBT PLZ COMMENT GIVE ME UP-THUMB. THANKS....