Question

Trent Weaver was reviewing the latest income statement for Taryn Enterprises. For the second year in a row, the Collectibles division was showing a negative segment margin, and Trent thought it was time to close the division to increase the company’s operating income. The income statement that he examined follows.

	promotions division	collectibles division	total
sales revenue	$5,300,000	$2,860,000	$8,160,000
less variable exp	3,650,000	1,645,000	5,295,000
contribution margin	1,650,000	1,215,000	2,865,000
less traceable fixed exp	943,000	1,275,000	2,218,000
segment margin	$707,000	$(60,000)	647,000
common fixed costs			555,000
net operating income			$92,000

                                                                                     

When Trent broke the news, Taylor Tatum, manager of the Collectibles division, was upset. Taylor thought that Trent could be making a snap judgment, and suggested that he look at the division’s detailed operating results. The Collectibles division is composed of two groups, Sports Memorabilia and Coins and Stamps. Sports Memorabilia accounts for 75% of the division’s sales and contribution margin; Coins and Stamps accounts for the other 25%. Sports Memorabilia’s traceable fixed costs are $450,000; Coins and Stamps, $350,000.

Required:

a. Prepare a segment margin income statement for the Collectibles division that shows the segment margin of each group.

b. Should Trent Weaver close the Collectibles Division? Why or why not?

Answer 1

Solution a:

Particulars	Sports Memorabilia division	Coins and Stamps division	Total
Aales revenue	$2,145,000.00	$715,000.00	$2,860,000.00
less variable exp	$1,233,750.00	$411,250.00	$1,645,000.00
contribution margin	$911,250.00	$303,750.00	$1,215,000.00
less traceable fixed exp	$450,000.00	$350,000.00	$800,000.00
segment margin	$461,250.00	-$46,250.00	$415,000.00
common fixed costs			$475,000.00
net operating income			-$60,000.00

Solution b:

Yes, trent weaver should close the collectible division, as if coin and stamp division was closed still company can avoid loss of $46,250 and will incur loss of $13,750. If it close completely collectible division , then it will avoid entire fixed cost traceable to collectible division, therefore could avoid entire loss of $60,000