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): 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

Question

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):  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

Quizplus · Accepted Answer

The decision should be based on the segment margin, not the contribution margin or the segment margin less allocated common fixed expenses. The contribution margin does not include traceable fixed expenses which would be eliminated if a flavor were discontinued. The segment margin less allocated common fixed expenses is net of the allocated common fixed expenses which would not be eliminated if a flavor were discontinued.

Toxemia Salsa Corporation Manufactures Five Flavors of Salsa