Condensed income statement data pro master champ

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Condensed Income Statement data: Pro Master Champ Total Sales $800,000 $300,000 $100,000 $1,200,000 Variable expenses 520,000 210,000 90,000 820,000 Contribution margin 280,000 90,000 10,000 380,000 Fixed expenses 80,000 50,000 30,000 160,000 Net income $200,000 $40,000 $(20,000) $ 220,000 Q: Should Champ line be eliminated?
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DeGrooteSchool.ca Martina Company – An Example (cont.) ± If Champ is eliminated, allocate its $30,000 fixed costs: 2/3 to Pro and 1/3 to Master ± Revised Income Statement data : Pro Master Total ± Sales $800,000 $300,000 $1,100,000 ± Variable expenses 520,000 210,000 730,000 ± Contribution margin 280,000 90,000 370,000 ± Fixed expenses 100,000 60,000 160,000 ± Net income $180,000 $ 30,000 $ 210,000 Total income has decreased by $10,000 ($220,000 - $210,000 )
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DeGrooteSchool.ca Martina Company – An Example (cont.) ± Incremental analysis of Champ provides the same results Net Income ± Continue Eliminate Increase (Decrease) ± Sales $100,000 $ - 0 - $(100,000) ± Variable expenses 90,000 - 0 - 90,000 ± Contribution margin 10,000 - 0 - (10,000) ± Fixed expenses 30,000 30,000 - 0 - ± Net income $(20,000) $(30,000) $ (10,000) Decrease in net income is due to Champ’s contribution margin of $10,000 that will not be realized if the segment is discontinued Decision: Do not eliminate Champ.
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DeGrooteSchool.ca Allocating Limited Resources ° Resources are always limited floor space for a retail firm raw material, direct labour hours, or machine capacity for a manufacturing firm ° Management must decide which products to make and sell to maximize net income
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DeGrooteSchool.ca Bilodeau Company – An Example ± Produces standard and deluxe pen and pencil sets ± Limiting resource – 3,600 machine hours per month Deluxe set Standard set ² Contribution margin per unit $8 $6 ² Machine hours required 0.4 per unit 0.2 per unit ± Deluxe set has higher contribution margin : $8 ± Standard set takes fewer machine hours per unit
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DeGrooteSchool.ca Bilodeau Company – An Example (cont.) ° Must calculate contribution margin per unit of limited resource Deluxe Sets Standard Sets Contribution margin per unit (a) $8 $6 Machine hours required (b) ÷ 0.4 ÷ 0.2 Contribution margin per unit of limited resource [(a) ÷ (b)] $ 20 $ 30 ° Standard sets have higher contribution margin per unit of limited resources Decision: Shift sales mix to standard sets or increase machine capacity.
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DeGrooteSchool.ca Bilodeau Company – An Example (cont.) Alternative: Increase machine capacity from 3,600 to 4,200 hours Produce Produce Deluxe Sets Standard Sets ± Machine hours (a) 600 600 ± Contribution margin per unit ± of limited resource (b) $20 $30 ±
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