Vernon Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.
VERNON COMPANY | |||||||||||
Income Statements for the Year 2018 | |||||||||||
Segment | A | B | C | ||||||||
Sales | $ | 162,000 | $ | 249,000 | $ | 263,000 | |||||
Cost of goods sold | (124,000 | ) | (90,000 | ) | (79,000 | ) | |||||
Sales commissions | (21,000 | ) | (24,000 | ) | (24,000 | ) | |||||
Contribution margin | 17,000 | 135,000 | 160,000 | ||||||||
General fixed operating expenses (allocation of president’s salary) | (40,000 | ) | (41,000 | ) | (37,000 | ) | |||||
Advertising expense (specific to individual divisions) | (7,000 | ) | (19,000 | ) | 0 | ||||||
Net income | $ | (30,000 | ) | $ | 75,000 | $ | 123,000 | ||||
Required
Prepare a schedule of relevant sales and costs for Segment A.
Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.
1 | schedule of Relevant cost for segment A | ||
Particular | $ | $ | |
a. | Segment sales | 1,62,000.00 | |
b. | Relevant Cost | ||
Cost of Goods Sold | 1,24,000.00 | ||
Sales commission | 21,000.00 | ||
Advertising exp | 7,000.00 | 1,52,000.00 |
2. Comparitive income statement | ||
Particular | Keep Segment A | Eliminate seg A |
Segment sales | 6,74,000.00 | 5,12,000.00 |
Relevant Cost | ||
Cost of Goods Sold | 2,93,000.00 | 1,69,000.00 |
Sales commission | 69,000.00 | 48,000.00 |
Contribution Margin | 3,12,000.00 | 2,95,000.00 |
General Fixed Expense | 1,18,000.00 | 1,18,000.00 |
Advertising exp | 26,000.00 | 19,000.00 |
Net income | 1,68,000.00 | 1,58,000.00 |
No, Segment A should not be eliminated because due to elimination of Seg A , net operating income will also be decreased
Vernon Company operates three segments. Income statements for the segments imply that profitability could be improved...
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