Cornerstones of Managerial Accounting 6th Edition by Maryanne Mowen,Don Hansen ,Dan Heitger

Exercise 21

Segmented Income Statement, Management Decision Making
FunTime Company produces three lines of greeting cards: scented, musical, and regular. Segmented income statements for the past year are as follows:

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. CONCEPTUAL CONNECTION 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%. If you were Kathy, how would you react to this information?
2. CONCEPTUAL CONNECTION Jim warns Kathy that eliminating the scented and musical lines would lower the sales of the regular line by 20%. Given this information, would it be profitable to eliminate the scented and musical lines?
3. CONCEPTUAL CONNECTION Suppose that eliminating either line reduces sales of the regular cards by 10%. 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.