Question

ABC, Inc., is segmented into three divisions and the company is concerned about the performance of Division Y. During your analysis of Division Y, you learn that $42,000 of the fixed expenses relate to general corporate expenses and had been allocated equally between the three divisions.

	Total Company				Division X				Division Y				Division Z
Sales	$	200,000			$	80,000			$	50,000			$	70,000
Variable expenses		120,000				52,000				30,000				38,000
Contribution margin	$	80,000			$	28,000			$	20,000			$	32,000
Fixed expenses		60,000				20,000				22,000				18,000
Net income (loss)	$	20,000			$	8,000			$	(2,000	)		$	14,000

(a.) Calculate what the company's net income would be if Division Y were closed down.
(b.) Revise the income statement presented above into a more useful segmented income statement.

Answer 1

a. As General corporate expenses are allocated equally between the three divisions it shows that it is a unavoidable fixed expenses which will still be incurred by the company even if the Division Y is closed down. Consequently the fixed expenses allocated to Division Y will now be transferred to the other two divisions.

Net income of the company after closing down Division Y = Net income of Division X + Net Income of Division Z - General corporate expenses allocated to Division Y = $8,000 + $14,000 - $14,000 = $8,000.

b. Revised income statement using segmented income statement:

	Total Company	Division X	Division Y	Division Z
Sales	$200,000	$80,000	$50,000	$70,000
Variable expenses	$120,000	$52,000	$30,000	$38,000
Contribution margin	$80,000	$28,000	$20,000	$32,000
Avoidable fixed expenses*	$18,000	$6,000	$8,000	$4,000
Segment Income	$62,000	$22,000	$12,000	$28,000
General corporate expenses	$42,000
Net Income	$20,000

*Avoidable fixed expenses - They will now be decreased by $42,000 which now will not be distributed to the three Divisions but will be decreased from the total segment income.

General corporate expenses distributed to each division = $42,000 / 3 = $14,000.

Avoidable fixed expense for Division X = $20,000 - $14,000 = $6,000

Avoidable fixed expense for Division Y = $22,000 - $14,000 = $8,000

Avoidable fixed expense for Division Z = $18,000 - $14,000 = $4,000.