Question

Anderson Publishing has two divisions: Book Publishing & Magazine Publishing. The Magazine division has been losing money for the last 5 years and Anderson is considering eliminating that division. Anderson’s information about the two divisions is as follows:

	Book Division				Magazine Division				Total
Sales Revenue	$	7,840,000			$	3,316,900			$	11,156,900
Cost of Goods sold
Variable costs		2,040,000				1,016,900				3,056,900
Fixed costs		1,081,500				1,210,300				2,291,800
Gross Profit	$	4,718,500			$	1,089,700			$	5,808,200
Operating Expenses
Variable		139,000				203,900				342,900
Fixed		2,920,000				1,191,200				4,111,200
Net income	$	1,659,500			$	(305,400	)		$	1,354,100

Only 20 percent of the fixed manufacturing costs and 60 percent of the fixed operating expenses are directly attribute to each division. The remainder are common or shared between the two divisions.

Required:

1. Present the financial information in the form of a segmented income statement (using the contribution margin approach).

2. What will be the impact on net income if the Magazine Division is eliminated?

Answer 1

Solution :

(1) Income Statement as per Contributon Margin Approcach :

Particulars	Book division	Magazine division	Total
Sales revenue	$ 7,840,000	$ 3,316,900	$ 11,156,900
Variable costs
Cost of goods sold	$ 2,040,000	$ 1,016,900	$ 3,056,900
Operating expenses	$ 139,000	$ 203,900	$ 342,900
Total variable cost	$ 2,179,000	$ 1,220,800	$ 3,399,800
Contribution	$ 5,661,000	$ 2,096,100	$ 7,757,100
Direct fixed costs
Attributable fixed costs	$ 1,968,300	$ 956,780	$ 2,925,080
Segment Profit	$ 3,692,700	$ 1,139,320	$ 4,832,020
Common fixed costs			$ 3,477,920
Net Income			$ 1,354,100

(2)

What will be the impact on net income if the Magazine Division is eliminated?

Decrease in Income by $ 1,139,320 which is the Magzines Division's Profit.

Working :

	Book	Magzine	Total
Attributable fixed costs	($ 1,081,500 * 0.20) + ($ 2,920,000 * 0.60) = $ 1,968,300	($ 1,210,300 * 0.20) + ($ 1,191,200 * 0.80) = $ 956,780	$ 2,925,080

Common Fixed Cost = Total Fixed Cost - Attributable Fixed Costs

= ($ 2,291,800 + $ 4,111,200) - $ 2,925,080  

= $ 3,477,920