Segment elimination decision
Chamberline Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.
CHAMBERLINE COMPANY Income Statements for the Year 2012 | |||
Segment | A | B | C |
Sales | $162,000 | $235,000 | $245,000 |
Cost of goods sold | (121,000) | (92,000) | (95,000) |
Sales commissions | (15,000) | (22,000) | (22,000) |
Contribution margin | 26,000 | 121,000 | 128,000 |
General fixed oper. exp. (allocation of president’s salary) | (44,000) | (52,000) | (44,000) |
Advertising expense (specific to individual divisions) | (3,000) | (10,000) | 0 |
Net income | $ (21,000) | $ 59,000 | $84,000 |
Required
a.Explain the effect on profitability if Segment A is eliminated.
b. Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.
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