Rx Plus Pharmacy has two major business segments: Retail and Wholesale. In December, the Retail business...

Rx Plus Pharmacy has two major business segments: Retail and Wholesale. In December, the Retail business segment had sales revenues of $2,500,400, contribution margin ratio of 80% and traceable fixed expenses of $1,200,320. During the same month, the Wholesale business segment had sales revenues of $2,960,000, contribution margin ratio of 30% and traceable fixed expenses of $720,000. Common fixed expenses totaled $400,000 and were allocated based on sales (46% to retail, 54% to wholesale)

Required:

a. Prepare a segmented income statement in the contribution format for the company.

b. The CFO thinks that when common fixed expenses are taken into account, the Wholesale segment is losing money. He is contemplating the possibility of closing the Wholesale segment but not before asking for your opinion. What recommendation would you give to the CFO? Please explain.

Expert Solution

A. Segmented income statement in the contribution format

Particulars	Retail	Wholesale
A. Revenue	25,00,400	29,60,000
B. Variable Cost	5,00,080	20,72,000
C. Contribution (A-B)	20,00,320	8,88,000
D. Tracable Fixed Expense	12,00,320	7,20,000
E. Common Fixed Expense	1,84,000	2,16,000
F. Segment Profit (C-E-F)	6,16,000	-48,000

B. Opinion:

We don't Agree with the CFO's opinion of closing the Wholesale segment as though the same is generating loss, but that is after allocation of common fixed expenses of $216,000. This fixed expense would be incurred even if wholesale division is closed. If we see the picture eliminating this fixed cost, then there is net profit of $168,000. Henvce this division should not be closed.

ekkarill92 answered 2 years ago

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