Sandhill Company makes three models of tasers.
Tingler:
Sales $296,000
Variable expenses $151,700
Contribution Margin $144,300
Fixed expenses $117,800
Net income $26,500
Shocker:
Sales $504,000
Variable expenses $207,900
Contribution Margin $296,100
Fixed expenses $231,800
Net income $64,300
Stunner:
Sales $200,000
Variable expenses $138,200
Contribution Margin $61,800
Fixed expenses $95,000
Net income $(33,200)
Fixed expenses consist of $300,000 of common costs allocated to the three products based on relative sales, as well as direct fixed expenses unique to each model of $29,000 (Tingler), $80,600 (Shocker), and $35,000 (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 new income. Compute current net income for Sandhill Company.
In the dynamic landscape of business operations, companies often need to evaluate their product lines to ensure optimal resource allocation and profitability. Sandhill Company, a manufacturer of tasers, is faced with a critical decision regarding its product offerings. This essay delves into the financial analysis of Sandhill Company’s three taser models—Tingler, Shocker, and Stunner—considering their sales, variable expenses, contribution margins, fixed expenses, and net income. The objective is to determine the impact of discontinuing the Stunner line on the company’s current net income.
Tingler:
Sales: $296,000
Variable Expenses: $151,700
Contribution Margin: $144,300
Fixed Expenses: $117,800
Net Income: $26,500
Shocker
Sales: $504,000
Variable Expenses: $207,900
Contribution Margin: $296,100
Fixed Expenses: $231,800
Net Income: $64,300
Stunner:
Sales: $200,000
Variable Expenses: $138,200
Contribution Margin: $61,800
Fixed Expenses: $95,000
Net Income: $(33,200)
It’s evident that the Shocker model contributes significantly to the company’s net income, followed by the Tingler. However, the Stunner model incurs a negative net income, indicating it is currently operating at a loss.
Fixed Expenses Breakdown: The company’s fixed expenses consist of both common costs and direct fixed expenses unique to each model. Common costs, totaling $300,000, are allocated to the three products based on relative sales. Additionally, each model incurs direct fixed expenses: Tingler ($29,000), Shocker ($80,600), and Stunner ($35,000).
James Watt’s proposal to discontinue the Stunner line is based on the premise that eliminating this model would lead to an improvement in the company’s overall net income. Currently, the Stunner line operates at a loss of $(33,200), while the other two models are generating positive net incomes.
Impact on Net Income: Discontinuing the Stunner line would lead to the elimination of its direct fixed expenses ($35,000), contributing to potential cost savings. However, it’s essential to consider the contribution margin lost with the discontinuation, which is $61,800.
The net income change due to discontinuing the Stunner line would be -$33,200, as the loss in contribution margin wouldn’t offset the fixed expenses saved.
In conclusion, analyzing the financial data for Sandhill Company’s taser models reveals that discontinuing the Stunner line would not yield the desired increase in net income. Despite its negative net income, the contribution margin it provides is greater than its fixed expenses. The Shocker model stands out as the most profitable, significantly contributing to the company’s net income. Therefore, the discontinuation of the Stunner line might not be a prudent decision, considering the potential loss in contribution margin. Business decisions should be guided by a comprehensive understanding of financial data, ensuring that the chosen course of action aligns with the company’s overall profitability goals.
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