Question

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

ZACHARY COMPANY
Income Statements for the Year 2018
Segment	A				B				C
Sales	$	163,000			$	243,000			$	258,000
Cost of goods sold		(127,000	)			(86,000	)			(90,000	)
Sales commissions		(17,000	)			(32,000	)			(29,000	)
Contribution margin		19,000				125,000				139,000
General fixed operating expenses (allocation of president’s salary)		(34,000	)			(50,000	)			(40,000	)
Advertising expense (specific to individual divisions)		(4,000	)			(14,000	)			0
Net income	$	(19,000	)		$	61,000			$	99,000

Required

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

	Relevant Rev. and Cost items for Segment A Sales Cost of goods sold Advertising expense Sales commissions Effect on income $

b) 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.

	ZACHARY COMPANY Comparative Income Statements for the Year 2018 Decision Keep Seg. A Eliminate Seg. A Sales Cost of goods sold Sales commissions Contribution margin $ $ General fixed operating expenses Advertising expense Net Income $ $

Answer 1

	Answer =A)
	SCHEDULE OF RELEVANT SALES AND COST FOR SEGMENT A
	Sales		$                       1,63,000.00
	Cost of goods sold		$                     -1,27,000.00
	Advertising expense (specific to individual divisions)		$                           -4,000.00
	Sales commissions		$                         -17,000.00
	Effect on income		$                          15,000.00
	Answer =B)
	COMPARATIVE INCOME STATEMENTS FOR THE YEAR 2018
	Particulars	keep Seg. A	Elimination Segment A
	Sales	$                      6,64,000.00	$                       5,01,000.00
	Cost of goods sold	$                    -3,03,000.00	$                     -1,76,000.00
	Sales commissions	$                        -78,000.00	$                         -61,000.00
	Contribution margin	$                      2,83,000.00	$                       2,64,000.00
	General fixed operating expenses (allocation of president’s salary)	$                    -1,24,000.00	$                     -1,24,000.00
	Advertising expense (specific to individual divisions)	$                        -18,000.00	$                         -14,000.00
	Net income	$                      1,41,000.00	$                       1,26,000.00
	There is net decrease in net income by $ 15,000 if we eliminate the segment A