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	$	7,960,000			$	3,367,700			$	11,327,700
Cost of Goods sold
Variable costs		2,160,000				1,076,800				3,236,800
Fixed costs		1,093,500				1,241,200				2,334,700
Gross Profit	$	4,706,500			$	1,049,700			$	5,756,200
Operating Expenses
Variable		151,000				221,500				372,500
Fixed		2,932,000				1,197,900				4,129,900
Net income	$	1,623,500			$	(369,700	)		$	1,253,800

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

1. Segmented income statement:
A segmented income statement is prepared by separating the costs associated with different divisions with the common costs.

Workings:
It is given that, 20 percent of the fixed manufacturing costs and 60 percent of the fixed operating expenses are directly attribute to each division.

◆ Direct fixed costs:

Manufacturing costs = 20%

Book division = $1,093,500 × 20% = $218,700
Magazine division = $1,241,200 × 20% = $248,240

Operating expenses = 60%

Book division = $2,932,000 × 60% = $1,759,200
Magazine division = $1,197,900 × 60% = $718,740

The reminder, that is, 80 percent of the fixed manufacturing costs and 40 percent of the fixed operating expenses are common fixed costs. They are charged as common fixed costs from the total segment margin.

◆ Common fixed costs:

Manufacturing costs = 80%

Book division = $1,093,500 × 80% = $874,800
Magazine division = $1,241,200 × 80% = $992,960

Total common fixed manufacturing costs = $874,800 + $992,960 = $1,867,760

Operating expenses = 40%

Book division = $2,932,000 × 40% = $1,172,800
Magazine division = $1,197,900 × 40% = $479,160

Total common fixed operating expenses = $1,172,800 + $479,160 = $1,651,960

2. The impact on net income if the Magazine Division is eliminated:

If the magazine division is eliminated, it would result in a decrease in net income by $1,102,420.

Through the contribution margin segemnted income statement, it is identified that, it is the due to the presence of common fixed costs, the net income of magazine division reported a loss. When the common expenses are directly charged to the total profits, it was able to identify the segment profit margin of each division. Even if the magazine division is eliminated, the common fixed costs will still be incurred. Therefore, if the magazine division is eliminated, it would result in a decrease in net income by $1,102,420.