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, FunTime's vice president of marketing.
Required
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 percent. If you were Kathy, how would you react to this information?
2. Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20 percent. Given this information, would it be profitable to eliminate the scented and musical lines?
3. Suppose that eliminating either line reduces sales of the regular cards by 10 percent. Would a combination of increased advertising (the option described in Requirement 1) and eliminating one of the lines be beneficial? Identify the best combination for the firm.