Question

Vernon Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.

VERNON COMPANY
Income Statements for the Year 2018
Segment	A				B				C
Sales	$	162,000			$	249,000			$	263,000
Cost of goods sold		(124,000	)			(90,000	)			(79,000	)
Sales commissions		(21,000	)			(24,000	)			(24,000	)
Contribution margin		17,000				135,000				160,000
General fixed operating expenses (allocation of president’s salary)		(40,000	)			(41,000	)			(37,000	)
Advertising expense (specific to individual divisions)		(7,000	)			(19,000	)			0
Net income	$	(30,000	)		$	75,000			$	123,000

Required

1. Prepare a schedule of relevant sales and costs for Segment A.

2. 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.

Answer 1

1	schedule of Relevant cost for segment A
	Particular	$	$
a.	Segment sales		1,62,000.00
b.	Relevant Cost
	Cost of Goods Sold	1,24,000.00
	Sales commission	21,000.00
	Advertising exp	7,000.00	1,52,000.00

2. Comparitive income statement
Particular	Keep Segment A	Eliminate seg A
Segment sales	6,74,000.00	5,12,000.00
Relevant Cost
Cost of Goods Sold	2,93,000.00	1,69,000.00
Sales commission	69,000.00	48,000.00
Contribution Margin	3,12,000.00	2,95,000.00
General Fixed Expense	1,18,000.00	1,18,000.00
Advertising exp	26,000.00	19,000.00
Net income	1,68,000.00	1,58,000.00

No, Segment A should not be eliminated because due to elimination of Seg A , net operating income will also be decreased