Question

The president of Ravens Inc. attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year's traditional model income statement be revised, and she received the following report Division Total Company $424,000 243,000 $181,000 133,000 A. $168,000 101,000 $ 67,000 $108,000 62,000 $ 46,000 49,000 $ (3,000) Sales Variable expenses Contribution margin Fixed expenses $148,000 80,000 $ 68,000 44,000 40,000 $ 28,000 $48,000 23,000 Net income (loss) The president was told that the fixed expenses of $133,000 included $93,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!" Required: a. Evaluate the president's remark. The president's remark ignores the misleading result of arbitrarily allocated fixed expenses. The president's remark ignores the misleading result of arbitrarily allocated variable expenses. b. Calculate what the company's net income would be if Division B were closed down Net income without Division B 64,600

Answer 1

a.The president’s remark ignores the misleading result of arbitrarily allocated fixed expenses

Net Income now – segment margin lost on Division B

Net income = 48,000-(46000-18,000)

= $20,000

Note: Fixed expenses traceable to Division B = 49,000 – 93,000/3

= $18,000