Question

In: Accounting

Zachary Company operates three segments. Income statements for the segments imply that profitability could be improved...

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

Solutions

Expert Solution

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]

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