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CDM Corporation has two segments. The company sells boats and also rents boats. Information for the...

CDM Corporation has two segments. The company sells boats and also rents boats. Information for the two segments is given below. Currently, the total fixed costs are being split equally between the two divisions.

	Boat Sales	Boat Rentals	Total
Sales	206,000	300,000	506,000
Variable Costs	100,000	80,000	160,000
Operating Income	-24,000	120,000	96,000

The manager of the boat rental division wants a bonus and suggests discontinuing the boat sales division because of its poor showing. After further analysis, it is revealed that $100,000 of the fixed costs relates exclusively to depreciation of the rental boats and the remaining fixed costs are common costs supporting both segments. Prepare a more accurate segment income statement separating the traceable fixed costs.


Common Fixed CostsContribution MarginFixed CostsGross MarginSegment MarginSalesVariable CostsTraceable Fixed Costs
Common Fixed CostsContribution MarginFixed CostsGross MarginSegment MarginSalesVariable CostsTraceable Fixed Costs
Common Fixed CostsContribution MarginFixed CostsGross MarginSegment MarginSalesVariable CostsTraceable Fixed Costs
Common Fixed CostsContribution MarginFixed CostsGross MarginSegment MarginSalesVariable CostsTraceable Fixed Costs
Operating Income

Should the boat Sales division be discontinued? YesNo

How much would total operating income be if the boat sales division was discontinued? $

Solutions

Expert Solution

Fixed Cost for Boat sales as per above data= 206000-100000+24000=130000

Fixed Cost for rental Boat as per above data= 300000-80000-120000=100000

Total Fixed Cost= 130000+100000=230000 out of which 100000 is only for rental boat and balance of 130000 to be common for both the business i.e. 65000 for each business

Hence:- Operating income statement would be

Particulars

Boat Sales

Boat Rentals

Total

Sales

206000

300000

506000

Variable Cost

100000

80000

180000

Fixed Cost

65000

165000

230000

Operating Income

41000

55000

96000

Hence Boat Sales division should not be discontinued as it is a profitable business.

Further if boat sales division is discontinued Operating Income statement is:-

Particulars	Boat Rentals	Total

Sales	300000	300000
Variable Cost	80000	80000
Fixed Cost	230000	230000
Operating Income	-10000	-10000
Hence if sales division discontinued, then rental division would go into loss.

ekkarill92 answered 1 year ago

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