Question

Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia generated net operating income of $40,000. The following information was taken from last year's income statement segmented by flavor (brackets indicate a negative amount):

Wimpy Mild Medium Hot Atomic
Contribution margin $(2000) $45,000 $35,000 $50,000 $162,000
Segment margin $(16,000) $(5000) $7000 $10,000 $94,000
Segment margin less
allocated common fixed
expenses $(26,000) $(15,000) $(3000) $0 $84,000
Toxemia expects similar operating results for the upcoming year. If Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should Toxemia discontinue? A no flavors should be discontinued B wimpy C wimpy and mild D wimpy, mild, and medium

Answer 1

C wimpy and mild

Step-by-step explanation:

The Allocated fixed Common overhead is irrelevant for this Decision because the expense is a head office expense which is managed by a Head office department.

Of our interest is the Incremental Revenues and Expenses that result from existence of a Segment (Segment Margin).

The segment margin consists of controllable Fixed and Variable costs attributable to a particular segment.

Discontinue flavor giving a negative Segment Margin that is : Wimpy and Mild