Keep-or-Drop for Service Firm, Complementary Effects, Traditional Analysis
Devern Assurance Company provides both property and automobile insurance. The projected income statements for the two products are as follows:
| Property Insurance |
Automobile Insurance |
||
|---|---|---|---|
| Sales | $4,200,000 | $12,000,000 | |
| Less variable expenses | 3,830,000 | 9,600,000 | |
| Contribution margin | $370,000 | $2,400,000 | |
| Less direct fixed expenses | 400,000 | 500,000 | |
| Segment margin | $(30,000) | $1,900,000 | |
| Less common fixed expenses (allocated) | 100,000 | 200,000 | |
| Operating income (loss) | $(130,000) | $1,700,000 |
The president of the company is considering dropping the
property insurance. However, some policyholders prefer having their
property and automobile insurance with the same company, so if
property insurance is dropped, sales of automobile insurance will
drop by 12 percent. No significant non-unit-level activity costs
are incurred.
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Keep-or-Drop for Service Firm, Complementary Effects, Traditional Analysis Devern Assurance Company provides both property and automobile...
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