Cawley Company makes three models of tasers. Information on the three products is given below. Sales Variable expenses Contribution margin Fixed expenses Net income Tingler Shocker Stunner $304,000 $496,000 $200,000 149,800 193,300 139.400 154,200 302,700 60,600 119.984 226,816 93,200 $34.216 $75,884 $(32,600) Fixed expenses consist of $296,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $30,000 (Tingler), $80,000 (Shocker), and $34.000 (Stunner). The common costs will be incurred regardless of how many models are produced. The direct fixed expenses would be eliminated if that model is phased out. James Watt, an executive with the company, feels the Stunner line should be discontinued to increase the company's net income. (a) Compute current net income for Cawley Company. Net income $ 77500 (b) Compute net income by product line and in total for Cawley Company if the company discontinues the Stunner product line. (Hint: Allocate the $296,000 common costs to the two remaining product lines based on their relative sales.)

Explanation:

Computation of current net income for Cawley Company

Particulars     Tingler        Shocker              Stunner          Total

Sales  $304,000.00$496,000.00$200,000.00$1,000,000.00

Variable expense$149,800.00$193,300.00$139,400.00$482,500.00

Contribution Margin (Sales - Variable

expenses)$154,200.00$302,700.00$60,600.00$517,500.00

Fixed expenses$119,984.00$226,816.00$93,200.00$440,000.00

Net Income (Contribution Margin - Fixed

expenses)$34,216.00$75,884.00-$32,600.00$77,500.00

Computation of net income by product line and in total for Cawley Company if the company discontinues the Stunner product line

Particulars              Tingler              Shocker                 Total

Sales                  $304,000.00      $496,000.00           $800,000.00

Variable expense$149,800.00         $193,300.00          $343,100.00

Contribution Margin

(Sales - Variable expenses)$154,200.00$302,700.00$456,900.00

Fixed expenses:    

Common Fixed expenses

(296000*304000/800000)

(296000*496000/800000)$112,480.00$183,520.00$296,000.00

Direct fixed expenses$30,000.00$80,000.00$110,000.00

Total Fixed expenses$142,480.00$263,520.00$406,000.00

Net Income (Contribution Margin

- Fixed expenses)           $11,720.00$39,180.00$50,900.00

Tingler Net Income$11,720.00

Shocker Net Income$39,180.00

Total Net Income$50,900.00

Should Cawley eliminate the stunner produc tline?

NO

Net income would decrease from $ 77,500 to $ 50900