Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal.
Mohave’s information related to the Sand Trap line is shown below.
Segmented Income Statement for Mohave’s
Sand Trap Beach Umbrella Products
Less: Direct Fixed costs
Common fixed costs*
Net operating income (loss)
*Allocated based on total sales dollars.
Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products.
Complete the table given below (based on the above information) assuming that Mohave had no direct fixed overhead in its production and the entire $51,000 of fixed cost was common fixed cost.
Contribution Margin Gained on Indigo = ____________________
Contribution Margin Gained on Verde = ______________________
Contribution Margin Lost on Azul= ____________________________
Net Increase in Contribution Margin= _____________________
Change in Fixed Costs= ______________________
Net Change in Profit if Azul is Eliminated= ___________________
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