Question

The president of Ravens, Inc., attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year’s traditional model income statement be revised, and she received the following report:

							Division
		Total Company				A				B				C
Sales		$	418,000			$	166,000			$	106,000			$	146,000
Variable expenses			244,000				105,000				60,000				79,000
Contribution margin		$	174,000			$	61,000			$	46,000			$	67,000
Fixed expenses			130,000				43,000				48,000				39,000
Net income (loss)		$	44,000			$	18,000			$	(2,000	)		$	28,000

The president was told that the fixed expenses of $130,000 included $90,000 that had been split evenly between divisions because they were general corporate expenses. After looking at the statement, the president exclaimed, "I knew it! Division B is a drag on the whole company. Close it down!"

Required:

a. Evaluate the president's remark.

	The president's remark ignores the misleading result of arbitrarily allocated fixed expenses.
	The president's remark ignores the misleading result of arbitrarily allocated variable expenses.

b. Calculate what the company's net income would be if Division B were closed down.

Answer 1

a
The president's remark ignores the misleading result of arbitrarily allocated fixed expenses
b
Contribution margin of Division A and C	128000	=61000+67000
Less: Fixed expenses	112000	=130000-(48000-30000)
Net income without Division B	16000