Toxemia Salsa Corporation 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?

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

Segment Review

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

Benchmark of Flavors

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)