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Mohave Corp. is considering eliminating a product from its Sand Trap line of beach umbrellas. This collection is aimed at people who spend time on the beach or have an outdoor patio near the beach. Two products, the Indigo and Verde umbrellas, have impressive sales. However, sales for the Azul model have been dismal.

Mohave’s information related to the Sand Trap line is shown below.

Segmented Income Statement for Mohave’s

 Sand Trap Beach Umbrella Products

Indigo

Verde

Azul

Total

 Sales revenue

$

60,000

$

60,000

$

30,000

$

150,000

 Variable costs

34,000

31,000

26,000

91,000

 Contribution margin

$

26,000

$

29,000

$

4,000

$

59,000

 Less: Direct Fixed costs

1,900

2,500

2,000

6,400

 Segment margin

$

24,100

$

26,500

$

2,000

$

52,600

 Common fixed costs*

17,840

17,840

8,920

44,600

 Net operating income (loss)

$

6,260

$

8,660

$

(6,920)

$

8,000

 *Allocated based on total sales dollars.

Mohave has determined that eliminating the Azul model would cause sales of the Indigo and Verde models to increase by 10 percent and 15 percent, respectively. Variable costs for these two models would increase proportionately. Although the direct fixed costs could be eliminated, the common fixed costs are unavoidable. The common fixed costs would be redistributed to the remaining two products.