Homework Answers
a. General fixed operating expense are allocation. They will exist even if Segment A cease to exist. Hence not relvevant.
| Amt ($) | |
| Sales | 170,000 |
| COGS | -121000 |
| Commission | -22,000 |
| Contribution | 27,000 |
| Less: Fixed Costs | |
| Advertising expense | -6,000 |
| Effect on Income | +21000 |
b.
| Keep Segment A | Eliminate Segment A | |
| Sales | 170000+237000+262000 = 669,000 | 237000+262000 = 499,000 |
| COGS | 121000+89000+94000 = 304,000 | 89000+94000 = 183,000 |
| Sales Commission | 22000+27000+26000= 75,000 | 27000+26000 = 53,000 |
| Contribution | 290,000 | 263,000 |
| General Fixed Op exp. | 36000+35000+25000 = 96,000 | 96,000 |
| Advertising | 6000+15000 = 21,000 | 15,000 |
| Net Income | 173,000 | 152,000 |
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19,000
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(40,000)
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Fanning Company operates three segments. Income statements for
the segments imply that profitability could be improved if Segment
A were eliminated.
FANNING COMPANY
Income Statements for the Year 2018
Segment
A
B
C
Sales
$
163,000
$
252,000
$
252,000
Cost of goods sold
(124,000)
(85,000)
(79,000)
Sales commissions
(20,000)
(28,000)
(22,000)
Contribution margin
19,000
139,000
151,000
General fixed operating expenses (allocation of president’s
salary)
(42,000)
(40,000)
(28,000)
Advertising expense (specific to individual divisions)
(5,000)
(20,000)
0
Net income
$...
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