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		$84		$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		230,000

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)				$

Which product has the highest product margin?

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

Solution 1:

Kirchner Glass Products Division
Segmented Income Statement
Products
	A	B	C	Total
Sales	$1,800,000.00	$1,740,000.00	$700,000.00	$4,240,000.00
Less: Variable expenses	$1,200,000.00	$1,218,000.00	$1,070,000.00	$3,488,000.00
Contribution margin	$600,000.00	$522,000.00	-$370,000.00	$752,000.00
Less: Direct fixed expenses	$100,000.00	$430,000.00	$260,000.00	$790,000.00
Product margin	$500,000.00	$92,000.00	-$630,000.00	-$38,000.00
Less: Common fixed expenses				$200,000.00
Operating income (loss)				-$238,000.00

Product A has the highest product margin.

Solution 2:

Kirchner Glass Products Division
Segmented Income Statement
Products
	A	D	Total
Sales	$1,800,000.00	$800,000.00	$2,600,000.00
Less: Variable expenses	$1,200,000.00	$300,000.00	$1,500,000.00
Contribution margin	$600,000.00	$500,000.00	$1,100,000.00
Less: Direct fixed expenses	$100,000.00	$230,000.00	$330,000.00
Product margin	$500,000.00	$270,000.00	$770,000.00
Less: Common fixed expenses			$200,000.00
Operating income			$570,000.00

Improvement in profit = $570,000 - (-$238,000) = $808,000