Question

10-5 Segment margin income statement (LO 2) Magellan & Columbus, Ltd. manufactures boats and personal watercraft. The company operates three separate divisions: yachts, sailboats, and jet skis. The company's latest income statement is presented by product line as follows: Yachts Sailboats Jet Skis Total Sales revenue $60,000,000 $22,000,000 $6,000,000 $88,000,000 Variable cost of goods sold 30,000,000 12,000,000 3,500,000 45,500,000 Fixed cost of goods sold 9,000,000 5,000,000 700,000 14,700,000 Gross profit 21,000,000 5,000,000 1,800,000 27,800,000 Variable operating expenses 8,000,000 1,500,000 850,000 10,350,000 Fixed operating expenses 4.000.000 1,000,000 300,000 5,300,000 Allocated corporate costs 3,000,000 2,000,000 1,000,000 6,000,000 $ 6,000,000 $ Operating income 500,000 $ (350,000) $ 6,150,000 Required a. Prepare a segment margin income statement showing each of the three divisions. Fixed cost of goods sold and fixed operating expenses can be traced to each product line. b. Chris Columbus, CEO, is concerned about the Jet Ski division's operating loss; he wants to close the division to save money. Do you support his decision? Why or why not?

Answer 1

1. Segment Margin Income Statement

	Yachts	Sailboats	Jet Skis	Total
Sales Revenue	$60000000	$22000000	$6000000	$88000000
Less: Variable Costs
Cost of Goods Sold	$30000000	$12000000	$3500000	$45500000
Operating Expenses	$8000000	$1500000	$850000	$10350000
Contribution	$22000000	$8500000	$1650000	$32150000
Less: Specific Fixed Costs
Cost of Goods Sold	$9000000	$5000000	$700000	$14700000
Operating Expenses	$4000000	$1000000	$300000	$5300000
Profit Before Allocated Costs	$9000000	$2500000	$650000	$12150000
Less: Allocated Corporate Costs				$6000000
Operating Income				$6150000

2. The decision to close Jet Ski Division would result in loss of $650,000, currently being contributed by it towards allocated corporate costs. Therefore, it is not advisable to close the Jet Ski Division.