Question

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

Required:

1. Prepare segmented income statements for Products A, B, and C.

Kirchner Glass Products Division
Segmented Income Statement
Products
	A	B	C	Total
Sales	$	$	$	$
Less: Variable expenses
Contribution margin	$	$	$	$
Less: Direct fixed expenses
Product margin	$	$	$	$
Less: Common fixed expenses
Operating income (loss)				$

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.
$

Answer 1

1.

Kirchner Glass Products Division
Segmented Income Statement
Products
	A	B	C	Total
Sales	1800000	1740000	700000	4240000
Less: Variable expenses	1200000	1203500	1070000	3473500
Contribution margin	600000	536500	-370000	766500
Less: Direct fixed expenses	100000	430000	260000	790000
Product margin	500000	106500	-630000	-23500
Less: Common fixed expenses				200000
Operating income (loss)				-223500

2.

Kirchner Glass Products Division
Segmented Income Statement
Products
	A	D	Total
Sales	1800000	1600000	3400000
Less: Variable expenses	1200000	600000	1800000
Contribution margin	600000	1000000	1600000
Less: Direct fixed expenses	100000	250000	350000
Product margin	500000	750000	1250000
Less: Common fixed expenses			200000
Operating income			1050000

Profits will improve by $223500 + $1050000 = $1273500.