A segmented income statement for Smith & Eason’s Armory as shown below: Shield Club Tear Gas Grenade Total Sales Revenue $ 400,000 $ 200,000 $ 300,000 $ 900,000 Less: Variable Expenses 225,000 120,000 250,000 595,000 Contribution Margin $ 175,000 $ 80,000 $ 50,000 $ 305,000 Less Direct Fixed Expenses: Machine Rent (5,000) (20,000) (50,000) (75,000) Supervision (15,000) (10,000) (20,000) (45,000) Depreciation (35,000) (10,000) (25,000) (70,000) Segment Margin $ 120,000 $ 40,000 $ (45,000) $ 115,000 Refer to the information for Smith & Eason’s Armory above. Smith & Eason’s management is deciding whether to keep or drop the Tear Gas Grenade product line. Smith & Eason's’s mob control product line has a contribution margin of $50,000 (sales of $300,000 less total variable costs of $250,000). All variable costs are relevant. Relevant fixed costs associated with this line include 80% of Tear Gas Grenade’s machine rent and all of Grenade’s supervision salaries. Questions: Would you recommend the company to drop the Tear Gas Grenade Product line? Support your answer with appropriate computations. There is additional information that the elimination of the Tear Gas Grenade line would result in a 20% decrease in the sales of the Club line. Do you think the company should drop the Grenade line? List other factors that Smith & Eason should consider in deciding whether to drop the Tear Gas Grenade line (at least 2 factors).

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A segmented income statement for Smith & Eason’s Armory as shown below:

	Shield	Club	Tear Gas Grenade	Total
Sales Revenue	$ 400,000	$ 200,000	$ 300,000	$ 900,000
Less: Variable Expenses	225,000	120,000	250,000	595,000
Contribution Margin	$ 175,000	$ 80,000	$ 50,000	$ 305,000
Less Direct Fixed Expenses:
Machine Rent	(5,000)	(20,000)	(50,000)	(75,000)
Supervision	(15,000)	(10,000)	(20,000)	(45,000)
Depreciation	(35,000)	(10,000)	(25,000)	(70,000)
Segment Margin	$ 120,000	$ 40,000	$ (45,000)	$ 115,000

Refer to the information for Smith & Eason’s Armory above. Smith & Eason’s management is deciding whether to keep or drop the Tear Gas Grenade product line. Smith & Eason's’s mob control product line has a contribution margin of $50,000 (sales of $300,000 less total variable costs of $250,000). All variable costs are relevant. Relevant fixed costs associated with this line include 80% of Tear Gas Grenade’s machine rent and all of Grenade’s supervision salaries.

Questions:

Would you recommend the company to drop the Tear Gas Grenade Product line? Support your answer with appropriate computations.
There is additional information that the elimination of the Tear Gas Grenade line would result in a 20% decrease in the sales of the Club line. Do you think the company should drop the Grenade line?
List other factors that Smith & Eason should consider in deciding whether to drop the Tear Gas Grenade line (at least 2 factors).

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