Answer:
We should discontinue Wimpy and we will be saving $2,000 as addition to the Net Margin.
Fixed Expenses will be incurred whether we produce or not, thus the deciding factor is a segment being able to generate a positive Contribution Margin.
By discontinuing Wimpy the allocated Fixed Expense will go up to $12,500 Per active unit from $10,000. Although Wimpy will yet retain its Fixed Expense.
Explanation:
Toxemia Salsa Corporation
<u>Segment Review</u>
A.
Wimpy
Contribution Margin = -$2,000
Less Fixed Expense = -$14,000
Segment Margin = -$16,000
Less Allocated Fixed Expense = -$10,000
Net Segment Margin = -$26,000
B.
Mild
Contribution Margin = $45,000
Less Fixed Expense = -$50,000
Segment Margin = -$5,000
Less Allocated Fixed Expense = -$10,000
Net Segment Margin = -$15,000
C.
Medium
Contribution Margin = $35,000
Less Fixed Expense = -$28,000
Segment Margin = $7,000
Less Allocated Fixed Expense = -$10,000
Net Segment Margin = -$3,000
D.
Hot
Contribution Margin = $50,000
Less Fixed Expense = -$40,000
Segment Margin = $10,000
Less Allocated Fixed Expense = -$10,000
Net Segment Margin = -$0
E.
Hot
Contribution Margin = $162,000
Less Fixed Expense = -$68,000
Segment Margin = $94,000
Less Allocated Fixed Expense = -$10,000
Net Segment Margin = -$84,000
F.
Total of flavors
Contribution Margin = $290,000
Less Fixed Expense = -$200,000
Segment Margin = $90,000
Less Allocated Fixed Expense = -$50,000
Net Segment Margin = $40,000
<u>Benchmark of Flavors</u>
If we stop to produce Wimpy we would save $2,000 assuming we will yet incur the segment Fixed Expense of $14,000 in any case (decision: Discontinue)
If we stop to produce Mild we would lose $45,000 assuming we will yet incur the segment Fixed Expense of $50,000 in any case (decision: Continue)
If we stop to produce Medium we would lose $35,000 assuming we will yet incur the segment Fixed Expense of $28,000 in any case (decision: Continue)
If we stop to produce Hot we would lose $50,000 assuming we will yet incur the segment Fixed Expense of $40,000 in any case (decision: Continue)
If we stop to produce Atomic we would lose $162,000 assuming we will yet incur the segment Fixed Expense of $68,000 in any case (decision: Continue)
