Question

Zachary Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.

ZACHARY COMPANY
Income Statements for the Year 2018
Segment	A				B				C
Sales	$	168,000			$	246,000			$	254,000
Cost of goods sold		(122,000	)			(74,000	)			(85,000	)
Sales commissions		(16,000	)			(25,000	)			(30,000	)
Contribution margin		30,000				147,000				139,000
General fixed operating expenses (allocation of president’s salary)		(40,000	)			(39,000	)			(35,000	)
Advertising expense (specific to individual divisions)		(4,000	)			(14,000	)			0
Net income	$	(14,000	)		$	94,000			$	104,000
a)Prepare a schedule of relevant sales and costs for Segment A. Relevant Rev. and Cost items for Segment A Sales Advertising expense Cost of goods sold Sales commissions Effect on income

b)

Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.

	ZACHARY COMPANY Comparative Income Statements for the Year 2018 Decision Keep Seg. A Eliminate Seg. A Sales Cost of goods sold Sales commissions Contribution margin General fixed operating expenses Advertising expense Net Income

Answer 1

Answer 1

Relevant Rev. & Cost items for Segment A

Sales	$168,000
Less : Advertising expense	($4,000)
Less : Cost of goods sold	($122,000)
Less : Sales commissions	($16,000)
Effect on income [incremental]	$26,000

Note : The above computation also means that if Segment A is eliminated the overall net income will drop by $26,000

Answer 2

ZACHARY COMPANY

Comparative Income Statements for the Year 2018

Decision Keep Seg. A ($) Eliminate Seg. A ($) Sales 668,000 500,000 Cost of goods sold (281,000) (159,000) Sales commissions (71,000) (55,000) Contribution margin (316,000) 286,000 General fixed operating expenses (114,000) (114,000) Advertising expense (18,000) (14,000) Net Income $184,000 $158,000

Note :

• Even if Segment A gets eliminated , its allocated general fixed cost (president’s salary) stilll will borne by the company .
• If Segment A is eliminated the net income will drop by $26,000 [$184,000 - $158,000]