Question

The operations of Smits Corporation are divided into the Child Division and the Jackson Division. Projections for the next year are as follows:

	Child Division		Jackson Division		Total
Sales revenue	$250,000		$180,000		$430,000
Variable expenses	90,000		100,000		190,000
Contribution margin	$160,000		$80,000		$240,000
Direct fixed expenses	75,000		62,500		137,500
Segment margin	$85,000		$17,500		$102,500
Allocated common costs	35,000		27,500		62,500
Total relevant benefit (loss)	$50,000		$(10,000)		$40,000

Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be

Answer 1

Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be $22,500

Working

	Child Division	Jackson Division	Total
Sales revenue	$ 250,000.00		$ 250,000.00
Variable expenses	$ 90,000.00		$   90,000.00
Contribution margin	$ 160,000.00	$              -	$ 160,000.00
Direct fixed expenses	$ 75,000.00		$   75,000.00
Segment margin	$ 85,000.00	$              -	$   85,000.00
Allocated common costs	$ 35,000.00	$ 27,500.00	$   62,500.00
Total relevant benefit (loss)	$ 50,000.00	$ (27,500.00)	$   22,500.00

If jackson is dropped then the allocated fixed cost will still be incurred. This allocated cost will be reallocated to chilld division making the net income lower than before.