Question

5. When Mr. Ding L. Berry, president and chief executive of Berry, Inc., first saw the segmented income statement below, he flew into his usual rage: "When will we ever start showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!" Product Lines Total V W Sales $250,000 $100,000 $75,000 $75.000 Variable expenses 119,000 37.000 35,000 47.000 Contribution margin 131.000 63.000 40.000 28.000 Traceable fixed expenses 98,000 31.000 37.000 30,000 Common expenses, allocated 32.900 18.000 10.500 4.400 Net operating income (loss)... S100 $14.000 $17.500) $16.400) *These traceable expenses could be eliminated if the product lines to which they are traced were discontinued. Required: 915%) Recommend which segments, if any, should be eliminated. Prepare a report in good form to support your answer.

Answer 1

Answer

Mr. Ding L. Berry is taking Allocated expenses for decision making which is wrong. Therefore ,We have to calculate Profit generated by Products with their specific cost not by allocating common Expenses as follows:-

		Product Lines
		U($)	V ($)	W($)
Sales		100,000	75,000	75,000
Variable Expenses		37,000	35,000	47,000
Contribution Margin	63,000	40,000	28,000
Less: Traceable Fixed Cost	31,000	37,000	30,000
Profit		32,000	3,000	(2,000)

  

Since now We can conclude that Product line U & V are generating Positive Profits by $32,000 & $3,000.However Product line W is generating negative profits of $2,000.

Therefore MR. Ding L. Berry, President and chief executive of Berry Inc. should only drop Product line W Thereafter Berry Inc. position will be as follow:-

	Product Lines
	U	V	Total
Sales	100,000	75,000
Variable Expenses	37,000	35,000
Contribution Margin	63,000	40,000
Less: Traceable Fixed Cost	31,000	37,000
Common Expenses(allocated)	18,000	10,500
Net Operating Income(Excluding unallocated expenses)	32,000	3,000
Total Income (U+ V)			35,000
Less: unallocated expenses	4,400		4,400
Net Operating Income(Profit)	27,600		30,600

From the above we can conclude that If Berry Inc. drop product line W which was generating loss company shall be in profits .Also it can be seen that If they drop both product line V & W, Then Profit shall be only $27,600 Which is less than Profit generated by both U &V.This is because that product line V is generating Net Operating income excluding allocated expenses of $3,000,this is adding to company’s total profit.     

Therefore from above it can be concluded that Mr.Ding L. Berry should only drop product line W and should continue with Product line U & V to gain profit of $30,600.

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