Question

Corporation has two divisions: Blue Division and Gray Division. The following financial information is for the most recent operating period:

	Blue	Gray
	Division	Division
Sales	100,000	367,500
Variable Expenses	45,000	147,000
Traceable Fixed Expenses	37,950	139,800

Common fixed expense for Benson Corporation was $65,270.

A. A properly constructed segmented income statement in the contribution format would show that net operating income of the whole company was:

B. The Blue Division's break-even sales is closest to:

C. What is the company's overall net operating income (loss) if it operates at the break-even points for its two divisions?

D. The marketing department of the company has submitted a proposal that would increase sales in the Blue Division by 5%. The proposal would result in a $5,000 increase in marketing expenses specific to the Blue Division. If the proposal is implemented, then the financial impact on the Blue Division is:\

E. A proposal has been made that will lower variable expenses in Gray Division to 35% of sales. However, this reduction can only be accomplished by an increase in Gray Division's traceable fixed expenses of $8,000. If this proposal is implemented and sales remain constant, overall company net operating income should:

Answer 1

	Ans A.
	Segmented Income Statement
	Contribution Margin Format
	Divisions	Blue	Grey	Total
A	Sales	100,000	367,500	467,500
B	Less : Variable Expense	45,000	147,000	192,000
C	Contribution Margin =A-B	55,000	220,500	275,500
D	Traceable Fixed Expense	37,950	139,800	177,750
E	Segment Operating Income =C-D=	17,050	80,700	97,750
F	Common Fixed Expense			65,270
H	Net Operating Company ( whole company level )			32,480

Ans B.	Blue
Sales	100,000
Less : Variable Expense	45,000
Contribution Margin	55,000
Contribution Margin % =55,000/100,000=	55.00%
Traceable Fixed Expense	37,950
Break Even Sales =37950/55%=	69,000
So Blue division's Break Even sales =$69,000

Ans C.
At BEP for both Blue & Grey divisions , Contribution margin for each division
will be equal to traceable Fixed costs.
	Blue	Grey	Total
Break Even Contribution Margin =	37,950	139,800	177,750
Less : Traceble Fixed Expense	37,950	139,800	177,750
Segment Operating Income =	-	-	-
Common Fixed Expense			65,270
Net Operating Company ( whole company level )			(65,270)
Therefore , when both divisions operate at BE level, net operating loss will be =		$            (65,270)

	Ans D.
	Impact of Marketing expense increase.
	Divisions	Blue
A	Sales	105,000
B	Less : Variable Expense	47,250	45% of sales
C	Contribution Margin =A-B	57,750	55% of sale
D	Traceable Fixed Expense	42,950
E	Segment Operating Income =C-D=	14,800
	Segment Operating Income without extra marketing spend	17,050
	Decrease in Segment Operating Income	(2,250)
	So The Net operating Income of Blue division will
	decrease by $2,250 with the proposal of Marketing
	expense increase.

	Ans E
	Revised Net Operating income with change in Grey Division Income & Expense
	Segmented Income Statement
	Contribution Margin Format -Revised Scenario
	Divisions	Blue	Grey	Total
A	Sales	100,000	367,500	467,500
B	Less : Variable Expense	45,000	128,625	173,625
C	Contribution Margin =A-B	55,000	238,875	293,875
D	Traceable Fixed Expense	37,950	147,800	185,750
E	Segment Operating Income =C-D=	17,050	91,075	108,125
F	Common Fixed Expense			65,270
H	Net Operating Company ( whole company level )			42,855
	Net Operating Company ( whole company level ) w/o change in Grey division changes			32,480
	Increse in Overall company's net Operating Income			10,375
	So Overall Company's Net Income will increase by $10,375