In: Accounting
Please provide the correct answer and explanation
Segmented Income Statements, Adding and Dropping Product Lines
Dantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Dantrell will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows:
Sales | $4,590,000 | ||
Less: Variable expenses | 3,953,450 | ||
Contribution margin | $636,550 | ||
Less: Direct fixed expenses | 675,000 | ||
Divisional margin | $(38,450) | ||
Less: Common fixed expenses (allocated) | 200,000 | ||
Divisional profit (loss) | $(238,450) |
Upon arriving at the division, Dantrell requested the following data on the division’s three products:
Product A | Product B | Product C | |||||
Sales (units) | 12,000 | 14,500 | 10,000 | ||||
Unit selling price | $150 | $120 | $70 | ||||
Unit variable cost | $100 | $83 | $107 | ||||
Direct fixed costs | $100,000 | $430,000 | $260,000 |
He also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows:
Unit selling price | $80 | ||
Unit variable cost | 30 | ||
Direct fixed costs | 250,000 |
2. Assume that Dantrell decides to produce products A and D for the coming year. Prepare the segmented income statements for these two products.
Kirchner Glass Products Division | |||
Segmented Income Statement | |||
Products | |||
A | D | Total | |
Sales | $ | $ | $ |
Less: Variable expenses | |||
Contribution margin | $ | $ | $ |
Less: Direct fixed expenses | |||
Product margin | $ | $ | $ |
Less: Common fixed expenses | |||
Operating income | $ |
By how much will profits improve given the combination assumed
above? Enter your answer in dollars.
$
Solution
Kirchner Glass Products Division
Segmented income statement for Product A and Product D for the coming year:
Kirchner Glass Products Division |
|||
Segmented Income Statement |
|||
Products |
A |
D |
Total |
Sales |
$1,800,000 |
$1,600,000 |
$3,400,000 |
Less: Variable Expenses |
$1,200,000 |
$600,000 |
$1,800,000 |
Contribution margin |
$600,000 |
$1,000,000 |
$1,600,000 |
Direct fixed costs |
$100,000 |
$250,000 |
$350,000 |
Product Margin |
$500,000 |
$750,000 |
$1,250,000 |
Less: common fixed expenses |
0 |
0 |
$200,000 |
Operating income |
- |
- |
$1,050,000 |
Divisional profits assuming the combination of producing Product A and Product D = $1,050,000
Original divisional loss = ($238,450)
Increase in profits = $1,050,000 – (238,450)
= $811,550
Computations:
Sales -
product A = $150 x 12,000 = $1,800,000
Product D = $80 x 20,000 = $1,600,000
Variable expenses –
Product A - $100 x 12,000 = $1,200,000
Product D = $30 x 20,000 = $600,000