Segmented Income Statement, Management Decision Making FunTime Company produces three lines of greeting cards: scented,...
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Accounting
Segmented Income Statement, Management Decision Making
FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows:
Scented
Musical
Regular
Total
Sales
$ 10,000
$15,000
$25,000
$50,000
Less: Variable expenses
7,000
12,000
12,500
31,500
Contribution margin
$ 3,000
$ 3,000
$12,500
$18,500
Less: Direct fixed expenses
4,000
5,000
3,000
12,000
Segment margin
$ (1,000)
$ (2,000)
$ 9,500
$ 6,500
Less: Common fixed expenses
7,500
Operating income (loss)
$(1,000)
Kathy Bunker, president of FunTime, is concerned about the financial performance of her firm and is seriously considering dropping both the scented and musical product lines. However, before making a final decision, she consults Jim Dorn, FunTimes vice president of marketing.
Required:
Question Content Area
1. Jim believes that by increasing advertising by $1,000 ($250 for the scented line and $750 for the musical line), sales of those two lines would increase by 30%.
Prepare segmented income statements based on Jim's assumptions.
Note: Enter all amounts as positive numbers except subtotals, if applicable.
FunTime Segmented Income Statement
blank
Scented
Musical
Regular
Total
blank
Sales
$fill in the blank fbcfa0fadfb904f_1
$fill in the blank fbcfa0fadfb904f_2
$fill in the blank fbcfa0fadfb904f_3
$fill in the blank fbcfa0fadfb904f_4
blank
Less: Variable expenses
fill in the blank fbcfa0fadfb904f_5
fill in the blank fbcfa0fadfb904f_6
fill in the blank fbcfa0fadfb904f_7
fill in the blank fbcfa0fadfb904f_8
blank
Contribution margin
$fill in the blank fbcfa0fadfb904f_9
$fill in the blank fbcfa0fadfb904f_10
$fill in the blank fbcfa0fadfb904f_11
$fill in the blank fbcfa0fadfb904f_12
blank
Less: Direct fixed expenses
fill in the blank fbcfa0fadfb904f_13
fill in the blank fbcfa0fadfb904f_14
fill in the blank fbcfa0fadfb904f_15
fill in the blank fbcfa0fadfb904f_16
blank
Segment margin
$fill in the blank fbcfa0fadfb904f_17
$fill in the blank fbcfa0fadfb904f_18
$fill in the blank fbcfa0fadfb904f_19
$fill in the blank fbcfa0fadfb904f_20
blank
Less: Common fixed expenses
blank
blank
blank
fill in the blank fbcfa0fadfb904f_21
blank
Operating income (loss)
blank
blank
blank
$fill in the blank fbcfa0fadfb904f_22
blank
Question Content Area
If you were Kathy, how would you react to this information?
Kathy should
accept reject
this proposal. The 30% sales increase, coupled with the increased advertising,
reduces increases
the loss. Both scented and musical product-line profits increase. However, more must be done. If the scented and musical product margins remain negative, the two products may need to be dropped.
Question Content Area
2. Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%.
Prepare an income statement for Fun Time assuming the Scented and Musical greeting card lines are dropped.
Note: Enter all amounts as positive numbers except subtotals, if applicable.
FunTime Income Statement (Regular Greeting Cards only)
Sales
$fill in the blank e47c94fe5fb4073_1
Less: Variable expenses
fill in the blank e47c94fe5fb4073_2
Contribution margin
$fill in the blank e47c94fe5fb4073_3
Less: Fixed expenses
fill in the blank e47c94fe5fb4073_4
Operating income (loss)
$fill in the blank e47c94fe5fb4073_5
Question Content Area
Given this information, would it be profitable to eliminate the scented and musical lines?
While dropping the two lines results in
a lossincome
of $fill in the blank 78152afd3f86041_2 it is
worsebetter
than the alternative offered in Requirement 1.
Question Content Area
3. Suppose that eliminating either line reduces sales of the regular cards by 10%. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial?
Prepare segmented income statements assuming the Musical line is dropped and advertising is increased.
Note: Enter all amounts as positive numbers except subtotals, if applicable.
FunTime Segmented Income Statement
blank
Scented
Regular
Total
Sales
$fill in the blank a459effd306dfb3_1
$fill in the blank a459effd306dfb3_2
$fill in the blank a459effd306dfb3_3
Less: Variable expenses
fill in the blank a459effd306dfb3_4
fill in the blank a459effd306dfb3_5
fill in the blank a459effd306dfb3_6
Contribution margin
$fill in the blank a459effd306dfb3_7
$fill in the blank a459effd306dfb3_8
$fill in the blank a459effd306dfb3_9
Less: Direct fixed expenses
fill in the blank a459effd306dfb3_10
fill in the blank a459effd306dfb3_11
fill in the blank a459effd306dfb3_12
Segment margin
$fill in the blank a459effd306dfb3_13
$fill in the blank a459effd306dfb3_14
$fill in the blank a459effd306dfb3_15
Less: Common fixed expenses
blank
blank
fill in the blank a459effd306dfb3_16
Operating income (loss)
blank
blank
$fill in the blank a459effd306dfb3_17
Question Content Area
Based on your calculations above, identify the best combination for the firm.
Drop scented line and keep musical lineDrop musical line and keep scented lineDrop both scented and musical lineKeep both scented and musical line
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