Question

Anderson Publishing has two divisions: Book Publishing & Magazine Publishing. The Magazine division has been losing money for the last 5 years and Anderson is considering eliminating that division. Anderson's information about the two divisions is as follows: Book Division $ 7,860,000 Magazine Division $ 3,360,000 Total $11, 220,000 Sales Revenue Cost of Goods sold Variable costs Fixed costs Gross Profit Operating Expenses Variable Fixed Net income 2,015,000 78,100 $ 5,766,900 1,015,000 206,000 $ 2,139,000 3,030,000 284,100 $ 7,905, 900 141,000 3,922,000 $ 1,703,900 204,000 2,195,000 (260,000) 345,000 6,117,000 $ 1,443,900 $ The variable operating expenses are directly attributable to the division. Of the total fixed costs (manufacturing and operating), $4,006,000 are shared between the divisions, allocated $2,817,000 to the Book Division and the remaining to the Magazine Division. The remainder of the fixed costs are directly attributable to each division. Required: 1. Present the financial information in the form of a segmented income statement (using the contribution margin approach). 2. What will be the impact on net income if the Magazine Division is eliminated?

Answer 1

Answer 1:

	Book division	Magazine division	Total
Sales revenue	$      7,860,000	$                  3,360,000	$      11,220,000
Variable costs
Cost of goods sold	$      2,015,000	$                  1,015,000	$        3,030,000
Operating expenses	$         141,000	$                     204,000	$            345,000
Total variable cost	$      2,156,000	$                 1,219,000	$        3,375,000
Contribution	$      5,704,000	$                  2,141,000	$        7,845,000
Direct fixed costs
Attributable fixed costs	$      1,183,100	$                  1,212,000	$        2,395,100
Benefit for each department	$      4,520,900	$                     929,000	$        5,449,900
Attributable fixed costs			$        4,006,000
Net Income			$        1,443,900

Answer 2:

Impact on Net Income: $ 929,000 (decrease).

Explanation:

Even if the magazine division is eliminated, the fixed cost of $ 1189,000 will still be incurred.

In case of any doubt, please comment.