Question

1. Segmented Income Statements, Adding and Dropping Product Lines

   Dantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Dantrell will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows:

   Sales		$4,590,000
   Less: Variable expenses		3,953,450
   Contribution margin		$636,550
   Less: Direct fixed expenses		675,000
   Divisional margin		$(38,450)
   Less: Common fixed expenses (allocated)		200,000
   Divisional profit (loss)		$(238,450)

   Upon arriving at the division, Dantrell requested the following data on the division’s three products:

   		Product A		Product B		Product C
   Sales (units)		12,000		14,500		10,000
   Unit selling price		$150		$120		$70
   Unit variable cost		$100		$83		$107
   Direct fixed costs		$100,000		$430,000		$250,000

   He also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows:

   Unit selling price		$80
   Unit variable cost		30
   Direct fixed costs		240,000

   Required:

   1. Prepare segmented income statements for Products A, B, and C.

   Kirchner Glass Products Division
   Segmented Income Statement
   Products
   	A	B	C	Total
   Sales	$	$	$	$
   Less: Variable expenses
   Contribution margin	$	$	$	$
   Less: Direct fixed expenses
   Product margin	$	$	$	$
   Less: Common fixed expenses
   Operating income (loss)				$

   Which product has the highest product margin?
   

   2. Assume that Dantrell decides to produce products A and D for the coming year. Prepare the segmented income statements for these two products.

   Kirchner Glass Products Division
   Segmented Income Statement
   Products
   	A	D	Total
   Sales	$	$	$
   Less: Variable expenses
   Contribution margin	$	$	$
   Less: Direct fixed expenses
   Product margin	$	$	$
   Less: Common fixed expenses
   Operating income			$

   By how much will profits improve given the combination assumed above? Enter your answer in dollars.
   $

Answer 1

segmented income state ments for Products A, B, and Requirement Kirchner Glass Products Division Segmented Income Statement Products Total Sales Less: Variable expenses Contribution ma rgin Less: Direct fixed expenses Product margin Less: Common fi xed expenses Operating income 4,240,000 1,200,000 $1,203,500$1,070,000$3,473,500 600,000$536,500($370,000)$766,500 780,000 ($13.500) 200,000 213,500 1800,000 1,740,000 700,000 100,000 500,000 430,000 250,000 620,000) $106,500($620,0 Product A has the highest product margin. Requirement 2 Assume that Dantrell decides to produce products A and D for the coming year. the segmented income statements for these two products re Product D will displace over Product C since the product margin of Product C is negative. The Company shall produce the equal quantity of Product Ci.e. 10,000 units Kirchner Glass Products Division Segmented Income Statement Products Total $1,800,000$800,000$2,600,000 1,200,000300,000$1,500,000 1100000 340,000 760,000 200,000 560,000 Sales Less: Variable expenses Contribution ma rgin Less: Direct fixed expenses Product margin Less: Common fixed expenses Operating income 500,000 100,000$240,000 260,000 600,000 500,000 Additional profits ($560,000 (-$213,500)) $773,500 Profits will improve by $773,500