Question

The segmented income statement for XYZ Company for the year ended December 31, 2016, tollows: XYZ COMPANY Segmented Income Statement For the Year Ended December 31. 2016 Total CompenyProduct A $ 305,000 146,000 Product B $ 118,000 51.000 Product C 182.000 6,000 Sales Variable axpenses Contribution margin Fixed expenses $ 605,000 273,000 332 159.0 280.000 $ 52.000 159.000 44,000 23,000 7.000 $ 29,000 Operaing income The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product, During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here: al Company Product AProduct B Product C $100,000 Direct fixed expenses 573,000 59,000 $18,000 The remaining fixed expenses are considered to be corporate-wide expenses that have been allocated to each product line based on sales revenue. Required: a, What will be the effect of the decision to discontinue product A on operating income?

Answer 1

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Part a:
Total Allocated Fixed Expense to Product A		$ 159,000
Less: Directly Relatable Expense to A		$    73,000
Fixed Expense to be incurred even after discontinuing A		$    86,000
Operating income will DECREASE by $ 86,000 for Company
Part b:
		Total		Product B	Product C
Sales		$ 300,000		$118,000	$ 182,000
Variable Cost		$ 127,000		$ 51,000	$    76,000
Contribution Margin		$ 173,000		$ 67,000	$ 106,000
Direct Fixed Expense		$    27,000		$    9,000	$    18,000
Common Fixed Expense (in the Sales ratio)
180000/300000*118000		$ 180,000		$ 70,800	$ 109,200
180000/300000*182000
Operating Income/Loss		$ -34,000		$ -12,800	$ -21,200
Part c:
		Total		Product B	Product C
Sales		$ 300,000		$118,000	$ 182,000
Variable Cost		$ 127,000		$ 51,000	$    76,000
Contribution Margin		$ 173,000		$ 67,000	$ 106,000
Direct Fixed Expense		$    27,000		$    9,000	$    18,000
Segment Margin		$ 146,000		$ 58,000	$    88,000
Common Fixed Expense (in the Sales ratio)
180000/300000*118000		$ 180,000		$ 70,800	$ 109,200
180000/300000*182000
Operating Income/Loss		$ -34,000		$ -12,800	$ -21,200