Segmented income statement The president of Truman, 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:
| Total Company | Division
| ||
A | B | C | ||
Sales | $400,000 | $160,000 | $100,000 | $140,000 |
Variable expenses | 240,000 | 104,000 | 60,000 | 76,000 |
Contribution margin | $160,000 | $ 56,000 | $ 40,000 | $ 64,000 |
Fixed expenses | 120,000 | 40,000 | 44,000 | 36,000 |
Net income (loss) | $ 40,000 | $ 16,000 | $ (4,000) | $ 28,000 |
The president was told that the fixed expenses of $120,000 included $84,000 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.
b. Calculate what the company’s net income would be if Division B were closed down.
c. Write a policy statement related to the allocation of fixed expenses.
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