Question

PATTERSON COMPANY Income Statements for the Year 2014 Segment Sales Cost of goods sold А В C $165,000 $250,000 $257,000 (87,000) (29,000) (129,000) (16,000) (82,000) (30,000) Sales commissions Contribution margin General fixed oper. exp. (allocation of president's salary) Advertising expense (specific to individual divisions) 134,000 145,000 20,000 (48,000) (35,000) (35,000) (3,000) (16,000) 0 $ (18,000) 70,000 $110,000 Net income Required: a. Prepare a schedule of relevant sales and costs for Segment A Relevant Rev.and Cost items for Segment A Effect on income 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 PATTERSON COMPANY Comparative Income Statements for the Year 2014 Keep Seg. Eliminate Decision Seg. A Sales Cost of goods sold Sales commissions Contribution margin Gen. fixed operating expenses Advertising expense Net Income

Answer 1

Relevant costs are the avoidable costs
Sales	165,000
Cost of Goods sold	(129,000)
Sales Commissions	(16,000)
Advertising Expense	(3,000)
Effect on Income	17,000
Note: Common allocated expenses are unavoidable and hence are not relevant
Comparative Income Statement
	Keep Segment A	Eliminate Segment A
Sales	672,000	507,000
Cost of Goods sold	(298,000)	(169,000)
Sales Commissions	(75,000)	(59,000)
Contribution Margin	299,000	279,000
General fixed operating expenses	(118,000)	(118,000)
Advertising Expense	(19,000)	(16,000)
Net Income	162,000	145,000