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The segmented income statement for XYZ Company for the year ended December 31, 2016, follows: XYZ...

The segmented income statement for XYZ Company for the year ended December 31, 2016, follows: XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2016

Total Company Product A Product B Product C

Sales $ 610,000 $ 305,000   $ 118,000 $ 187,000

Vari. expenses 273,000 146,000 53,000 74,000

Cont. margin $ 337,000 $ 159,000 $ 65,000 $ 113,000

Fixed expenses 283,000 164,000 49,000 70,000

Oper. income $ 54,000 $ (5,000 ) $ 16,000 $ 43,000

The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to continue or discontinue the product. During your investigation, you discover that certain fixed expenses are traceable directly to each product line as indicated here:

Total Company Product A Product B Product C

Direct fixed expenses $102,000 $75,000 $10,000 $17,000

The remaining fixed expenses are considered to be corporate-wide expenses that have been allocated to each product line based on sales revenue.

Required: a. What will be the effect of the decision to discontinue product A on operating income?

b. Assume that product A is discontinued. Prepare a segmented income statement for the remaining products. Allocate corporate-wide fixed expenses as described. (Round intermediate calculations to 2 decimal places.)

c. Starting with the segmented income statement, use the information you discovered during your investigation to present a more appropriately designed segmented income statement.

Solutions

Expert Solution

a. Effect of Decision to discontinue product a-

Fixed cost burden (164,000-75,000) = 89,000

Less: Saving of Product A loss =5,000

Operating Income will decrease by 84,000

b)

XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2016
Total Product B Product C
Sales $ 305,000.00 $ 118,000.00 $ 187,000.00
Variable Expenses $ 127,000.00 $    53,000.00 $    74,000.00
Contribution Margin $ 178,000.00 $    65,000.00 $ 113,000.00
Direct Fixed Expenses $    27,000.00 $    10,000.00 $    17,000.00
Common Fixed Expenses $ 181,000.00 $    70,026.23 $ 110,973.77
Operating Income/loss $ (30,000.00) $ (15,026.23) $ (14,973.77)

c)

XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2016
Total Product A Product B Product C
Sales $ 610,000.00 $ 305,000.00 $ 118,000.00 $ 187,000.00
Variable Expenses $ 273,000.00 $ 146,000.00 $    53,000.00 $    74,000.00
Contribution Margin $ 337,000.00 $ 159,000.00 $    65,000.00 $ 113,000.00
Direct Fixed Expenses $ 102,000.00 $    75,000.00 $    10,000.00 $    17,000.00
Segment margin $ 235,000.00 $    84,000.00 $    55,000.00 $    96,000.00
Common Fixed Expense $ 181,000.00
Operating Income/loss $    54,000.00

ekkarill92 answered 5 months ago
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